Tangible change at Fordham endowment in manager re-vamp

Geeta Kapadia, CIO of Fordham University’s $1 billion endowment is rolling out a suite of changes that include paring back the fund’s 50 or so manager relationships, introducing new passive allocations, testing the water on internal management in fixed income and preparing the ground for an inaugural sustainability strategy.

“My general preference is for a smaller, concentrated portfolio,” says Kapadia in an interview with Top1000funds.com from the New York university endowment’s Bronx headquarters. In some cases, she might swap managers by replacing incumbents with those who are a better fit and creating some multiple partnerships. But in other corners of the portfolio, she is considering removing the mandate altogether.

“We have more managers than we need and instead of adding value they are detracting, costing us money, and in some cases, providing only benchmark performance. Every portfolio could lose a manager; my overall objective is to reduce the total number of managers.”

Kapadia has recruited a new, five-strong team (comprising two new hires and two internal promotions) to oversee the traditional, growth-focused portfolio where the largest allocations include absolute return hedge funds (15 per cent of AUM), public and private equity and a smaller allocation to private credit. A year and a half since taking the helm, she is about to put her vision into action.

That begins with the introduction of new passive mandates. Until now the whole portfolio has been actively managed but from year-end new passive managers in equity and fixed income will come in. “We are hoping to implement decent-sized passive allocations by year-end,” she says. “I don’t think looking for long-only US equity managers that outperform is a great use of our time. I’d rather take active risk in private markets than in public equities or credit.”

In a further break with the past she is also considering insourcing passive fixed income. “At my previous firm, we successfully managed a passive fixed income allocation in house. Building off that expertise, we may consider implementing a similar portfolio at Fordham.”

The team continue to scrutinize manager relationships across the portfolio where she says it’s been a good time to re-evaluate the strength of private equity partnerships to make positive changes – despite the slower fund-raising environment, managers are coming back to re-up. “We are evaluating our existing private equity managers’ funds while continuing to develop relationships with new managers,” she says.

She tends to favour small, niche GPs including new managers coming to market with their second or third fund that are looking to partner with institutions focused on growth and long-term relationships. Typical questions focus on managers’ intentionality and decision-making processes, firm ownership and fees, in the types of conversations that are much easier with smaller managers.

She also wants managers to provide analysis on how inflation is impacting founders and their decision to come to market; she expects insights on portfolio companies’ ability to hire, put money into the business or other factors that could support operations and ultimately outperformance.

In the main, Fordham tends to invest in private equity funds below the $5 billion mark and typically writes cheques of between $10-30 million – although she caveats that does depend on the opportunity and if there is overlap with the venture allocation. “We particularly like private equity focused on healthcare and education tech, and investments that are addressing challenges faced by underserved communities.”

Although she notes partnering with smaller and emerging managers gives Fordham the ability to influence fee negotiations, she is mindful that small GPs depend on fees to grow their teams and infrastructure, and she won’t push too far. “In contrast to the larger GPs, they typically need the fees more,” she says. “Our more challenging conversations about fees tends to be more with the bigger managers that have more room to negotiate.”

Fordham’s hedge fund managers are undergoing the same scrutiny.

She doesn’t invest in quantitative systematic funds as a rule, and her primary focus is meeting hedge fund portfolio managers in-person. Here she talks through the strategy, ensures it aligns with what the manger says; that the strategy is given time to demonstrate its value and that she understands any underperformance.

“We need to get to know the managers and understand what they are doing, ensuring there isn’t an overlap between strategies, and that each portfolio is positioned to take advantage of the current environment.” She adds her knowledge of the names (mostly small and niche and focused on one or two strategies) is deeper than in private equity given she’s overseen relationships with many hedge fund firms in previous roles.

The hedge fund portfolio is mainly tasked with dampening the downside and providing uncorrelated returns. “Over the last fiscal year, the book did what we hoped and diversified away from low returning equity markets.”

Any changes to the manager roster will be on the margins, however she is focused on ensuring there isn’t an over reliance on long short managers and that she is not over-playing the US bias. “I really want to ensure we don’t just have a collection of long/short managers as a default. If I am going to add anything in this space, it will likely be non-US, but generally we have a strong portfolio already in place.”

In another change of tact, Kapadia is also mulling the introduction of more income producing assets. This is unlikely to be traditional fixed income that clips coupons, but she does want to see what investments exist that are long-term, provide regular income, and can contribute to funding Fordham’s 4.5 per cent annual spend that is wholly dependent on investment revenues and donations.

“To ensure we don’t have to sell investments to fund our liquidity needs, we think three to four quarters ahead regarding our spend.” She says Fordham’s return target looks to fund the spend and add a couple of percentage points above that.

Going forward she is also keen to do more to integrate sustainability. The endowment already has direct exposure to sustainability funds, but she wants “to do better” and is mulling a strategy that could begin with divestment.

“When it comes to ESG, we believe we may be behind our peers,” she says. A new leadership team at the top of the university; a new investment committee, her own new team and consultant, plus growing engagement from Fordham’s student community is shifting the scales. “We will increasingly spend time thinking what exposure we must companies we are not excited about, and what a potential ESG policy might look like. We want to demonstrate tangible change and need to decide as an institution what we want to achieve and how achievable those objectives are.”