Tue 6 Mar 2007
News of windfalls on Wall Street have become as common and unsurprising as rain: traders collect $50 million bonuses, top hedge fund managers haul in more than $100 million in a single year. In such gilded company, annual compensation of $1.3 million looks paltry. Yet that was how much David F. Swensen took home in 2005 for supervising Yale University’s endowment, now worth $20 billion.
Mr. Swensen, one of the most well-regarded investors in the country, never appears on lists of the most highly paid money managers. Nor has he made headlines by buying expensive homes in New York or Palm Beach or by frequenting cocktail and charity circuits. But in the competitive, performance-driven world of money managers, Mr. Swensen can boast of an extraordinary record.
During his 21 years as steward of the Yale endowment, Mr. Swensen has generated an annual compound growth rate of 16.3 percent, beating the performance of Harvard’s endowment and that of every other major school in the country over the same period, according to data compiled by Yale. Over the years, he has also routinely rebuffed lucrative offers to leave Yale and to cash in on his expertise in a much grander fashion.
“People think working for something other than the most money you could get is an odd concept, but it seems a perfectly natural concept to me,” says Mr. Swensen, a slender, soft-spoken man who looks and dresses like a high school teacher. “When I see colleagues of mine leave universities to do essentially the same thing they were doing but to get paid more, I am disappointed because there is a sense of mission,” in endowment work.
Swensen’s record at Yale is impressive although skeptics will note that it is difficult to know how much of this is due to Swensen and how much to the Yale name. Jack Meyer’s performance at Harvard was similarly excellent, but Meyer has not done nearly as well since leaving Harvard behind. Note:
But within the clubby money management world, a Yale investment is akin to a seal of approval, and managers avidly court Mr. Swensen. They describe him as a thorough researcher who, with his team, scrutinizes his choices intensely before committing money.
In other words, it is much easier for Yale to invest in an opportunity because the investment manager can then use Yale’s presence to court other investors. And, since Swensen is smart, he uses this leverage to get a much better deal for Yale than is available for others. Could Swensen get the same sort of access if he didn’t have the “Yale” on his business card? I doubt it.
Like many hedge funds, Farallon charged a 1 percent management fee and took 20 percent of the profits. “David told us: ‘I don’t see why we would give you any money. You might shut down after a bad year,’ ” Mr. Steyer recalled.
It was only after Mr. Steyer swore that he wouldn’t shut down — and that he wouldn’t immediately charge Mr. Swensen 20 percent of his profits and other fees — that Mr. Swensen gave Mr. Steyer some of Yale’s money.
The Eph connection to any of this? See below.
Morty (having already brought the Yale housing system to Williams) now wants to do the same to the Williams endowment. The hiring of Collette Chilton was a move in this direction. Chilton’s main selling point to Williams, I think, was that she had led the creation of the Lucent investment group from scratch, as Lucent was spun off from ATT.
I [Chilton] went to Lucent to do a startup. I set up an investment management group to oversee the pension fund and all other retirement-related assets. Lucent had been spun off of AT&T in 1996, and the last piece of that spin-off was taking control of the pension fund. So when Lucent recruited me, I was the sole subject matter expert. Lucent put me in a cube and gave me a phone and said, “Just go do it.” It was just an incredible opportunity, obviously. It was great.
That was five and a-half years ago. Now the department has 24 employees, and office locations in Boston and New Jersey. We manage about $40 billion in assets.
According to my sources, Chilton is doing the same for Williams, setting up a Boston office, hiring a bunch of (expensive?) professionals and trying to follow the path blazed by Swensen and others. What’s the first step in that process? Hiring your old secretary, of course!
Williams College has announced the following administrative appointments.
Maureen Sullivan, executive assistant, Investment Office, Boston. She attended the Boston Business School. Previously, she worked as executive assistant to the chief investment officer of Lucent Asset Management Company, for OHO, Gamelogic, Schwartz Communications, Molten Metal Technology Inc., and Harvard University.
Now, I should be less snarky than this. After all, investment professionals often have executive assistants (I don’t) and Chilton is certainly in a position to judge that Sullivan is skilled and professional. Still, was that really the first hire that needed to get made? And why is this office in Boston in the first place?
Note the charmingly naive coverage of this topic from the Record.
Chilton will commute between her offices in Williamstown and Boston. “Investment does not occur here at Williamstown,” Chilton said, “and so we need to have an office at a financial capital, which in this case is Boston.” She will be on campus Mondays and Tuesdays on a regular basis. “So far it’s been easy,” she said, “but then again, it’s not snowing yet.”
This is highly misleading. When you control an endowment of $1.5 billion, you are the client, you are the one with the power, you are the one that other people travel to meet. Investment managers, whether from the worlds of private equity, hedge funds, venture capital or any other field, will gladly come to Williamstown (or anywhere else) for a chance to manage a portion of that money. The reason that Chilton does not move to Williamstown is, almost certainly, because she and her family prefer to live in Weston. Nothing wrong with Weston, of course, but if Chilton does not care enough about Williams to move to Williamstown, what possible loyalty will she feel toward the College? Why wouldn’t she just take another job when a better offer comes along?
President Schapiro also played a part in this deception.
Eager to get started, Collette will disengage as quickly as possible from her current responsibilities and take up this new position sometime in October. As is typical with such positions, she’ll be based in a financial capital, in her case Boston, and have an office in Hopkins Hall, where she’ll spend significant time.
“I consider this a once-in-a-lifetime opportunity to be involved in the entrepreneurial start up of a new operation,” she said in accepting the position. “And Williams is such a fantastic school; I look forward to becoming part of the college community.”
First, it goes without saying that it is impossible to be a “part of the college community” if you live in Boston. But the key weasel phrase is “typical with such positions.” If the Record wanted to make trouble, it would investigate the truth of this statement. Find a set of positions like Chilton’s (CIO of a large endowment) and investigate how many of these individuals are located in a “financial capital” away from the institution for which they work.
Let me help. The article later mentions Paula Volent, vice president for investments at Bowdoin (and a protege of Swensen). She manages $670 million from that famous “financial capital,” Brunswick, Maine. Peter Shea does the same for Amherst from sunny central Massachusetts. Thomas Kannam is somehow able to manage Wesleyan’s $600 million endowment from Middletown, Connecticut. My, but the list of financial capitals in New England is larger than I imagined! And, of course, David Swensen himself does fine living in New Haven. Turns out that, if you control the money, people come to you.
If we can’t trust Morty/Chilton to be transparent with us about why she wants to work in Boston, why should we trust them to be honest about anything else?
More fun clues to the future of the Williams endowment can be gleaned from this handy listing of the investment staff at Williams. Having hired her former secretary, what is the next logical step for Chilton? Hire her buddy Bradford Wakeman to be her second-in-command, also working out of the Boston office. Will he be a “part of the college community,” interacting with students and faculty from 150 miles away? I have my doubts.
To be fair, I should no more begrudge Chilton the hiring Wakeman, who she seems to have worked with for more than a decade, than the selection of Sullivan. There is nothing wrong with hiring people that you know and trust. But, from a Williams point of view, these folks have zero connection to, or affection for, Williams as an institution. If Chilton leaves in a couple of years for greener pastures, is there any doubt that Wakeman, Sullivan (and everyone else she hires?) will follow her there as well?
Is the College spending millions of dollars to build a Williams Investment Office or a Chilton Investment Office? I wonder if Chilton’s employment agreement even covers such contingencies. If Chilton were working for any financial firm, she would be contractually prevented from hiring away her staff were she to leave. Did the College cover this contingency?
The biggest risk issue in any asset management situation is the option value to the asset manager. Will Chilton take on the appropriate amount of risk, consist with her guidance from Morty and the trustees? I hope so. But doing so might not be in her best financial interest. Imagine, instead, that she “shoots for the moon,” that she levers up the endowment and invests in the riskiest stuff available. If she is lucky, she (and the College) will win big. Then the fawning profiles from the Times will roll in and she will have the option of starting her own hedgefund and (trying to) generate serious personal wealth. Heads, she wins.
And, if it’s tails — if those risky bets don’t pay off, if our endowment performs poorly — Williams loses. Chilton, probably, keeps her job. She blames factors beyond her control. And, it will be hard for anyone to know what really happened.
Yale, smartly, hedges this risk by hiring someone like Swensen, someone whose commitment to the success of the institution is beyond question. Williams could have followed suit, could have selected an Eph Swensen, a younger graduate with finance experience and a deep connection to the College, someone already living in the Williamstown area or eager to move there. Someone committed to Williams for life, and not just until a better job comes along, until the commute to Williamstown becomes too annoying. Such candidates were available. Instead, the College chose Chilton. I hope it works out.
Yet loyalty is a second order concern relative to competence. Can Williams be sure that Chilton will hire the best people, or merely the people that she knows best and/or are most committed to her personally? Hard questions. Consider a recent presentation (pdf) by Wakeman to a risk meeting. His content seems sensible enough, but the topic (making a better 401(k) plan for Lucent) has almost nothing to do with running a major endowment.
That’s fine, perhaps Wakeman knows about other stuff as well. But I laughed out loud when reading the last slide.
Outside experts have noted, and applauded the changes Lucent made to its 401(k) plans.
Nobel laureate William Sharpe notes the changes Lucent made to its 401(k) plan: “better aligns their DB and DC plan methodologies.”
James Palermo, Vice Chairman of Mellon Financial Corporation, observed that: “Lucent is on the cutting edge of our client base with respect totreating their 401(k) plan in the same manner as their defined benefit pension plan.”
Stanford Law School Professor and co-founder of Financial Engines, Joseph Grundfest, commented that: “Lucent has made an important step in fiduciary oversight by implementing consistent management practices from plan to plan.”
Fidelity Investments recognized that: “Lucent was early in this initiative.”
Wakeman is quoting a bunch of vendors who sold things to Lucent, for whom Lucent is a customer, people who will say nice things about Lucent even if (especially if!) they think that the people in charge of the Lucent pension fund are the dumbest of the dumb.
And, as best as I can tell, Wakemen is using these quotes without a bullet point of irony. He really thinks (?!) that William Sharpe’s complimentary testimony about Lucent is meaningful information to his audience even though his audience knows that Lucent is paying thousands of dollars to Sharpe’s company: Financial Engines. My hope is that Wakeman is not this clueless, that he showed the slide but made a joke about the reliability of the testimony cited. That, anyway, is the best case scenario.
How competent is Chilton herself? Informed commentary welcome! I have spoken with people who have run money for her and the consensus opinion is that she is a solid professional. She has experience selecting and monitoring investment managers. And, if that was all she were planning to do, I would be comfortable. But you hardly need a staff of 8 or 10 to do that. And, I would be very uncomfortable if Chilton planned on investing any of he endowment money herself. (Harvard’s endowment both hires outside managers and invests some money itself.) What is the plan? The Record should fine out. Nathan Friend ’07 should interview Chilton on “The Hour.” (I will be able to provide him with an excellent set of questions.)
Again, perhaps this is too snarky. I wouldn’t have been so critical if it weren’t for the misleading statements about “financial capitals.” Morty and the trustees care about the endowment. There is no doubt in my mind that they want the very best for the College and that they have hired Chilton in the expectation that she was the best candidate for the job. I hope that they are right.
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