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US endowment slams consultants

Robert WaltonThe $4 billion Claremont University Consortium (CUC) has criticised the service small endowment funds in the US are receiving from their investment consultants, labelling the solutions as “cookie cutter, boilerplate answers”.

Speaking at an Asset Allocation Summit in Sydney last week, Robert A. Walton, chief executive officer of CUC – a consortium for seven independent colleges in southern California, said while funds with multiple billions of dollars typically received real, customised consulting solutions, the same did not apply for endowments with under US$1 billion in assets.

“The smaller buckets are getting cookie cutter, boilerplate answers,” he said.

“I expect there will be a large push back in the US from the smaller endowments as to the quality of customised, very specific thinking that goes into the advice that we get. I have concerns that new managers have innovative ideas but are not able to get in [to portfolios] because the consultants are either ignorant, stupid or lazy.”

Walton referred to the 2008 NACUBO Endowment Study (see Table 1), which shows that the smaller the endowment by assets, the lower the investment return is likely to be.

CUC is adopting a “back to basics” approach to investing on the back of the financial crisis and paying closer attention in the short term to the monitoring of liquid investments such as money market funds.

When addressing the question of whether diversification has failed endowments during the crisis, Walton said: “The basic principles do work; we just haven’t used them for a very long time. We do also believe we’re in truly uncharted territory.”

CUC has about 70 per cent of its assets in alternatives, and as a general principle will not invest with investment managers unless the principals have most of their net wealth (excluding their personal homes) in the fund.

“We think [alternatives] is a very good place to be today,” Walton said. “We’ve had to regroup and think about the fundamental principles of managing an endowment.”

Walton admitted that in the past there has been a lot of “gamesmanship” between endowments in the way that they manage money.

“It’s no longer about gamesmanship,” he said.

“We are planning very serious redundancies of staff, cancelling people’s scholarships – it’s affecting us in a very personal way. We are of the opinion – and when I say we, I mean most of the managers of large endowments – that we’re in a very difficult situation economically as we look at the investment outlook and how we’re structuring our portfolios going forward.”

CUC is located 30 miles east of Los Angeles, in South California, and is the central coordinating and support organisation for seven independent colleges known as The Claremont Colleges. The colleges include: Pomona College; Claremont Graduate University; Scripps College; Claremont McKenna College; Harvey Mudd College; Pitzer College; Keck Graduate Institute of Applied Life Sciences; Claremont University Consortium.

Table 1: Average investment pool compounded nominal rates of return for fiscal years ending June 30, 2008, and selected three, five and 10-year periods

 

Investment pool assets   

1-year                          

3-year

5-year

10-year

 

 % N=728

% N=699

% N=652

%N=494

Greater than $1 billion

0.6

12.0

13.3

9.5

 >$500 million to <$1 billion

-1.9

9.6

11.4

 7.6

 >$100 million to <$500 million

-2.9

8.5

10.1

 6.4

 >$50 million to <$100 million

-3.2

7.4

 9.3

 5.8

 >$25 million to <$50 million

-4.3

6.6

 8.4

 5.1

 Less than or equal to $25 million

-4.1

5.7

 7.2

 4.8

Source: 2008 NACUBO Endowment Study

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