As interest rates have dropped to historic lows and equity markets have become increasingly crowded, the importance of a sophisticated investment office has become an integral part of many institutions.

Trusted Insight spoke with chief investment officers tasked with establishing or rebuilding the investment program for leading institutional investment offices.

While the circumstances of each overhaul vary case by case, these chief investment officers outlined similar blueprints:

Inherited Portfolio
Jonathan Hook inherited a hybrid outsourced model at The Harry and Jeanette Weinberg Foundation. Rosalind Hewsenian took over from an outsourced chief investment officer at the Helmsley Trust, while The Cargill Philanthropies was managed by internal executives with the help of consultants before bringing in Shawn Wischmeier in 2012. 

Their first step was to take stock of the existing investment strategies.

“The lion share of the capital had been divided between four large investment firms and each of the four firms had the mandate to build a diversified portfolio,” Hook said. “They could build it however they chose, but three of the four could not use any alternatives. Only one was given the mandate to add in hedge funds and private equity."

What resulted was an inefficient portfolio of more than 120 managers.

“It was an extremely well-diversified mishmash when put together, but it was not really efficient,” he said. “We effectively held a very high-cost index. That’s not an indictment of any of the four firms because they were not allowed to collaborate with each other. We had overlap in some cases and we had places where we had no exposure. It wasn’t the fault of those firms, but it was due to the composition of the structure.”

Mercy Health’s legacy portfolio was recovering from the 2008 financial crisis.

“The equity risk in the portfolio was very high and highly correlated to benchmarks,” said Anthony Waskiewicz, Mercy’s inaugural chief investment officer. “Previous return outcomes were very volatile and the large drawdowns strained Mercy’s balance sheet metrics and debt covenants.”

Governance & Recruiting
“After coming to the foundation and talking with board members and senior leadership, we focused on getting the office infrastructure created and set up the procedures and policies by which we would operate,” Hook said. “This was important to establish before we began to re-configure the underlying portfolio.”

For Philip Rotner, chief investment officer at Boston Children’s Hospital, that means recruiting premier talent but also hiring and training young professionals. Hook recruited one of his former colleagues from his previous investment office to join him at the foundation. 

“One of the things that a proprietary team with investment discretion can do is to match the risk appetite of the institution to the portfolio on a proprietary and a real-time basis, and it can do it better than waiting for a consultant to make a recommendation at a board’s quarterly meeting,” Rotner said. “Further, a strong, mature team takes the burden off the investment committee to interpret a consultant's manager views. We can bring real-time activity levels up by being here day-to-day and having ownership and accountability for the investment decisions.” 

Wischmeier similarly spent much of his first year “creating the right organizational structure, and recruiting the right people with the right backgrounds to fill available roles.”

“You quickly learn that you need the right people in the right roles, motivated to do the right thing,” Wischmeier emphasized. 

Identify Institution's Financial Needs & Set Policy Statement
“The most effective institutional investment teams implement investment solutions that fit with the mission and overarching strategies of their respective organization,” Waskiewicz said. “We have worked diligently to customize an investment program that connects with Mercy’s mission, culture, balance sheet objectives and corporate strategies.”

During this process, the following questions are answered: Will we be making direct private equity commitments, invest in buyout funds, or both? Is there a desire to use intermediaries, such as consultants? 

Hewsenian’s first step toward writing an investment policy statement was to identify the institution’s real risk, which “the entire industry has always defined that as volatility or the risk of loss.”

“At Helmsley, I thought about it and decided the real risk we have is liquidity risk,” Hewsenian said. “I can withstand a temporary loss of asset value, as long as I don't have to transact. I need to make sure that I can fund the operations of the Helmsley Charitable Trust, and as long as I can do that, then volatility and short-term losses are risks I can certainly bear. That completely redefined my perspective, in terms of what I was looking for from a risk standpoint.”

Turning The Battleship
The Helmsley portfolio needed to be completely restructured, and the existing portfolio didn’t have any private market assets. 

“No venture capital, no buyout, not real estate, no private debt, nothing,” she said. “We developed that from scratch.”

Hewsenian and her team were fortunate to enter the market coming out of the financial crisis, and managed the J curve in such a way that never produced a negative IRR, in aggregate, at any point. 

“We supplied the marketplace liquidity at a steep discount to net asset value,” she said. “I'm telling you. You're better to be lucky than right. So, we were very lucky.”

However, Wischmeier and the Cargill Philanthropies weren’t as lucky. 
 
“In general, clean slates are very advantageous, especially clean slates where you're not overcommitted to closed-end funds,” he said. “However, a clean slate wasn't as beneficial during the last five years as one might have expected. You would like to have liquidity when liquidity is valuable.” 
 
Due to the historic equity bull market run, liquidity has not been that important, he said. Illiquid assets have generally returned in excess of public markets during this period, and the lack of these higher returning assets in the portfolio has been a drag on returns relative to peers with more mature portfolios.
 
“Having that liquidity has not been as useful over the last five years as what it could have been,” Wischmeier said. 

“We're forced to buy into markets that are increasing in value from year to year. We didn't have the benefit of having private equity and these other illiquid assets that were getting hugely marked-up valuations relative to their public counterparts.”

Hook began by leveraging long-standing manager relationships to reserve allocations for the Weinberg Foundation.

“We had some very long relationships that we wanted to keep and some were newer relationships that we want to sustain,” Hook said. “As we started rebuilding the portfolio, we've added those folks back in, essentially that list is completed now.”

In the end, despite vary conditions, each chief investment officer we spoke with took the same basic steps:

“We had to put together a strategic plan, we had to determine what our risk profile was and we literally turned a battleship 180 degrees,” Hewsenian said.

Read our previous Trusted Answers series here.