Ball State University and Foundation

Transcription

1 AGB Foundation Leadership Forum Hiring and Oversight of Investment Consultants and Discretionary Investment Managers Monday, January 23, 2012 Peter F. Campanella Vice-Chairman of the Board Ball State University Foundation David W. Bahlmann President and CEO Ball State University Foundation Ball State University and Foundation Ball State is a public university located in Muncie, Indiana with an enrollment of about 22,000. For the Foundation, total assets of about $200 million, investment portfolio of approximately $180 million. 2 1

2 Uniform Code of Fiduciary Conduct Prepare written investment policies, and document the investment decision-making process Diversify assets with regard to specific risk/return objectives of participants and beneficiaries Use prudent experts to make investment decisions Control investment expenses, and ensure the best execution of investment transactions Monitor the activities of all money managers and service providers Avoid all conflicts of interest 3 Uniform Prudent Management of Institutional Funds Act (UPMIFA) Delegation of Management/Investment (UPMIFA) Prudent delegation in good faith, care standard of prudent person To select agent Establish scope and terms of delegation Requires periodic review and supervision of agent Agent has duty of reasonable care Agent subject to court jurisdiction Delegation to committees, officers or employees as authorized by other law 4 2

3 Policy Asset Allocation (BSUF) Inflation-protection Assets - 20% Real Assets Domestic Equity TIPs Growth Assets - 55% Risk-reduction Assets - 25% Hedge Funds International Equity Private Equity Domestic/Global Fixed Income 5 Investment Process Large Investment Committee meeting 3x year Define Investment Objectives Approve Strategic Asset Allocation, Rebalancing Policy Hire Consultant and Investment Managers Resources: Internal CIO execute policies and IC decisions, provide daily monitoring of portfolio and of investment managers. No other staff or systems resources. Consultant advising on asset allocation, making investment manger recommendations, providing due diligence, performance and risk reporting. 50 Investment managers investing by style/strategy. 6 3

4 Investment Process What this model does well: Defining objectives appropriate to the institution Stable, strategic asset allocation suited to benign and positive investment environments Challenged: Tactical portfolio tilts / Opportunistic strategies Understanding and adopting advanced investment strategies and selecting corresponding investment managers Volatile markets Increased scrutiny and regulation Resources Fiduciary Fatigue 7 Endowment Investing Outsourcing NCSE Report

5 The Emergence of Outsourcing Investment Committee satisfies its fiduciary obligation by giving greater authority and discretion to an outside firm IC retains responsibility to set objectives and strategic asset allocation, but with wider ranges External Outsource provider given authority to: Make tactical portfolio tilts, opportunistic investments Hire/fire managers without IC approval Charge an additional performance fee (Skin in the game) 9 The Emergence of Outsourcing Many variations exist: Very consultant-like, but with more manager discretion. Assets owned by the client. Customized portfolios, but more use of commingled funds and assets owned by the provider. Single large commingled pool with no customization and full discretion to the provider. Different implications for function of Investment Committee, internal staff 10 5

6 Research and Selection Process (Generally) Many new entrants into the field Institutional demand Better business model than consulting Three sources of providers University endowment offices which became independent Consulting firms seeking to enhance services/fees Investment management firms looking to expand coverage of client portfolios 11 Research and Selection Process (BSUF) Task Force appointed of 8 IC members, 3 staff Identified 11 potential candidates sent RFI From responses, selected 7 semi-finalists On-site visits to all 7 semi-finalists plus extensive request for written documentation 3 finalists invited to make presentations Successful candidate approved at June 24 meeting Evaluation: Investment Process Governance Process Provider s Business Operations Total Costs 12 6

7 Investment Process Investment Philosophy: How do you seek investment return? Strategic/Tactical/Opportunistic? What is risk and how do you manage it? Governance: How are decisions made and by whom? What is the legal context? What resources are provided to the process? Defined in Investment Policy Statement 13 Investment Models A. Investment Committee/Bank Trust Department Model Small institutions Active investment committee Limited diversification Focused on retail investment vehicles Limited or no internal staff responsibilities/involvement B. Investment Committee/Consultant Model Role of Investment Committee Develop investment objectives Strategic asset allocation Manager hire/fire (assisted by consultant) Rebalancing (risk management is primarily rebalancing) 14 7

8 Investment Models B. Investment Committee/Consultant Model Role of Consultant Manages due diligence / portfolio performance / risk reporting Recommends, investments / managers to investment committee Investments owned by endowment Endowment has direct relationships with managers May be fund-of-fund investments or director investments Timeframe of decisions determined by frequency of investment committee meetings (monthly/quarterly/etc.) Lack of full-time attention to portfolio Limited capacity for tactical/opportunistic investments Investment philosophy/portfolio construction/ risk analytics / manager due diligence process are customizable, but dependent on the resources and capabilities of the consultant Fee for service basis 15 Investment Models C. Investment Committee/Outsource CIO Customized Portfolio Role of Investment Committee Develop investment objectives Strategic asset allocation Role of Outsource CIO Tactical asset allocation Opportunistic investing Manager hire / fire Manager due diligence Portfolio performance and risk reporting Risk management Portfolio can be customized to the objectives of the institution Investments may be owned by the endowment or may be owned by a fund managed by the Outsourced CIO firm (or a combination of the two) 16 8

9 Investment Models C. Investment Committee/Outsource CIO Customized Portfolio Endowment has relationship with managers only for assets managed outside the Outsourced CIO fund Timeframe of tactical / opportunistic / risk exposure decisions can be short, made by the Outsourced CIO firm, depending on the number of customized portfolios managed by the firm Full-time attention to the portfolio Investment philosophy, portfolio construction / risk analytics / manager due diligence process are determined by the Outsourced CIO firm Fee for service plus incentive fee based upon performance D. Investment Committee / Outsourced CIO Pooled Fund Role of Investment Committee Develop investment objectives 17 Investment Models D. Investment Committee / Outsourced CIO Pooled Fund Role of Outsource CIO Strategic and tactical asset allocation Opportunistic investment Manager hire / fire Manager due diligence Portfolio performance and risk reporting Risk management Investments are owned by a fund managed by the Outsourced CIO firm Portfolio is not customized for the endowment Endowment has no relationship with underlying investment managers Timeframe of tactical / opportunistic / risk exposure decisions can be short, made by Outsource CIO firm Full-time attention to the portfolio Investment philosophy / portfolio construction / risk analytics / manager due diligence process are determined by Outsource CIO firm Fee for service plus incentive fee based on performance 18 9

10 Investment Models E. Investment Committee / Outsourced CIO Internal CIO Role of Investment Committee Develop investment objectives Strategic asset allocation Role of the Outsourced CIO Tactical asset allocation Opportunistic investing Manager hire / fire Manager due diligence Portfolio performance and risk reporting Risk management * All with the participation of the internal CIO Investment may be owned by the endowment or may be owned by a fund managed by the Outsourced CIO firm, or a combination of the two Timeframe of tactical / opportunistic / risk exposure decisions can be short made by the Outsourced CIO form with the guidance and participation of the internal CIO 19 Investment Models E. Investment Committee / Outsourced CIO Internal CIO Full-time attention to the portfolio from both an external and internal perspective (both market conditions and changes in endowment investment objectives) Investment philosophy / portfolio construction / risk analytics / manager due diligence process are determined by Outsourced CIO firm Fee for service plus incentive fee based upon performance F. Investment Committee / Internal Staff Large, adequately resourced staff supports all functions under the oversight of the investment committee (examples: Harvard/Yale/Stanford/UTIMCO) Base compensation and bonus compensation issues are important to maintain continuity 20 10

11 The BSUF Model Investment Committee Investment Objectives Strategic Asset Allocation Investment Themes Risk Internal CIO Provide link, participate in both policy, monitoring (IC) and strategy and implementation (PWP) Transition, Ongoing oversight of legacy investments 21 Implementation Issues Reconciliation of Agreements/Contracts Offering Memorandum Investment Advisory Agreement Side Letter(s) Legacy Investments Transition legal responsibilities of parties Ongoing oversight duties/responsibilities 22 11

12 The Innovation Implementation of an outsourced model with an internal CIO Has drawn significant interest from a number of prominent outsourcing firms who see this as the emerging model in the industry and from peers who have been looking for a creative solution 23 Five Essential Take-Aways Looking Forward 1. What is truly your investment philosophy? Static / Passive Endowment Model Dynamic Model incorporating advanced strategies 24 12

13 Five Essential Take-Aways Looking Forward 2. What is the effectiveness of your investment decision making process? Do you have defined investment objectives? Are you meeting your investment objectives? 25 Five Essential Take-Aways Looking Forward 3. What investment roles/responsibilities does the board want to retain and which ones are they wanting/willing to delegate/share with an outside provider or provide for internally? How does the board define its fiduciary responsibility regarding investments? Does the board want to buy or build the necessary resources to accomplish its objectives? What talent is currently available (volunteer/staff)? 26 13

14 Five Essential Take-Aways Looking Forward 4. If the decision is to explore alternative processes then the board must be willing to commit the extensive volunteer and staff time/resources necessary to fully evaluate the options/opportunities available to your situation. 27 Five Essential Take-Aways Looking Forward 5. If the decision is made to embark on a new process, the board must then be willing to commit the same extensive volunteer and staff time/resources necessary to fully implement the new processes. Extensive legal work in crafting the engagement with the new providers (external/internal). Re-definition of board/provider governance (IPS/committee agendas/reporting processes). Transition of assets to the new process

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