Are CIOs Abandoning Pensions?

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It may be hyperbole, but it is common: outside commentators, media included, often perceive institutional investing as a variant of grade-school hierarchy. If public pensions are the shy, financially strapped high school student, corporate pensions are the overachieving nerd—always a step ahead of their public pension counterpart, slightly quicker in grasping concepts, more innovative and…funnier. Endowments and foundations are even more admired in this misguided analogy: they’d be considered the smart and driven jock, thriving both physically and mentally. Everything they do is filled with gusto and excitement, attracting contempt, jealousy, and awe among those who want to emulate them.

While this perception is far-fetched and superficial, it’s a perception that sheds light on some of the reasons that chief investment officers at public and private schemes are aiming to flee into the nonprofit world.

It’s also a trend that doesn’t come as much of a surprise, given the lure of compensation. “It is becoming more difficult for the public sector to compete for talent as the demand for investment professionals with multi-asset class experience continues to grow,” Lee Partridge, San Diego County Employees Retirement Association’s (SDCERA) outsourced portfolio strategist and CIO at Salient Partners, told aiCIO last year. In February, for example, Shawn Wischmeier, CIO of the $72 billion North Carolina Retirement System for just 19 months, resigned to become the CIO of the Margaret A. Cargill Philanthropies in Minnesota, nearly doubling his salary. 

Other examples of the transition from the corporate and public pension space into the endowment world are numerous. 

In March, Eric Henry, CIO for the $55 billion UAW Retiree Medical Benefits Trust in Michigan, was hired as CEO and CIO of the Hershey Trust Company in Hershey, Pennsylvania, which invests about $8.5 billion of charitable capital. Henry’s 2010 salary in Michigan: $499,332. The Hershey job paid the previous CIO $948,424, and Henry’s salary was presumed to be similar to or more than that, according to Charles Skorina, a CIO search provider. Meanwhile, Peter Gilbert, who oversaw investments and policy for the Pennsylvania State Employees’ Retirement System for 14 years, was named CIO for Lehigh University’s Endowment Fund in 2007. In June 2009, the University of Chicago named Boeing’s CIO Mark Schmid as its new chief investment officer. 

Besides the obvious attraction of a higher paycheck, another lure of the endowment and foundation arena is investing freedom. “When I was working at Wilshire managing $50 billion, it just wasn’t as much fun,” said Jim Dunn of Wake Forest University. “Managing an endowment is not a spectator sport. Endowments that are inactive are the ones that don’t do well. You don’t want to be complacent with strategies and managers. Within endowments, if you set ambitious goals and hire good people, you can do great things.” He added, “I’ll be at Wake Forest for as long as they’ll have me.”

Dunn’s comments help paint a more concrete picture of the factors driving the CIO exodus into the foundation and endowment space—largely attributable to the opportunity of managing a more diverse portfolio. “If you look at pure performance over the long-term, endowments have outperformed public and corporate plans. They have less of a need for immediate liquidity, so they can be more flexible,” said Pete Keliuotis, managing director of San Francisco-based consulting firm Strategic Investment Solutions. 

“I’ve talked with so many CIOs, and this trend has become more obvious,” said Heather Myers, Managing Director, Non-Profits, at Russell Investments. Myers noted that as defined benefit plans continue to be shut down and public plan CIOs are limited by intense political pressure, investors may see “more opportunity to spread their wings in the endowment and foundation space.” Myers added that many corporate CIOs have increasingly felt restricted with the increased use of liability-driven investing dominating. On the other hand, according to Myers, the nonprofit world of endowments and foundations remains a relatively cloistered one. “It has become more challenging to become a nonprofit CIO without prior nonprofit investment management experience,” therefore making it more difficult to transition from the public and corporate spaces. 

When asked about the reasons for CIO turnover, industry sources cited political pressure as a “big factor” for the perceived distaste for the public, and to a lesser extent corporate, pension space. The familiar reasoning is that in the nonprofit worlds, investment committees are generally more knowledgeable and there’s less bureaucracy. Example: “I got a call a couple of weeks ago from a public pension fund CIO,” Skorina said. “He gets a call once a week from a local state congressman demanding he steer public pension money into a specific investment.” 

Perhaps, then, the metaphor needs to be altered: The shy high school student/public pension has all the skills of its nerdy and athletic peers, but its parents—political appointees and realities—are limiting their ability to show it. —Paula Vasan