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LPs ‘May Confuse Luck For Skill’ In Manager Selection: Cargill Philanthropies' CIO | Exclusive Q&A Part II

by trusted insight posted 4years ago 1928 views

Shawn Wischmeier is the chief investment officer of Margaret A. Cargill Philanthropies. In part one of his interview with Trusted Insight, he discussed how he radically changed the investment team at Cargill Philanthropies and built an investment portfolio from almost a clean slate.

In part two of the interview, Wischmeier discusses the importance of strong governance and teamwork in accessing, identifying and executing private market strategies.

Wischmeier was recently named on Trusted Insight’s Top 30 Foundation Chief Investment Officers. He graciously spoke with us on Apr. 25, 2017. 

Trusted Insight: Private markets are all about access. How have your prior relationships helped you get access to premier funds?

Shawn Wischmeier: Most prior relationships do transfer. There are clear benefits of team members having worked at large, diverse organizations in the past. The relationships that we've coddled or managed over time typically allow us access to capacity-constrained investments and groups not out marketing or not seeking new partners. In some cases, there is no additional capacity no matter how strong a relationship may be.

I do think it gets back to the importance of a strong team. It's not only finding smart people that can do good analysis and select good investments, but it's also bringing in people that have very strong connections from their former jobs. Because our portfolios are relatively new, we need those managers or GPs to remember us and to help pay back the gratitude we had seen them in years before by being in multiple of their funds over time.

Having a fresh pool of capital with billions of dollars in the foundation space allows us to get on the radar of some groups that we may not have had a prior relationship with, whether that be public pension, insurance companies, sovereign wealth funds, etc.

Trusted Insight: What is the draw to partnering with a private foundation? 

Shawn Wischmeier: It's more about governance. I've already mentioned it, but governance is everything. You've got to have people that can act quickly and deliver on what they say in appropriate time frames.

All of that comes from good people, good systems and good governance. We have that in spades, which can make us ideal partners. Especially when partners are looking to be different, creative or work with a structure that doesn't necessarily fit in a bucket. As I described, the way we're set up we don’t have defined allocations to hedge funds or closed-end funds that we must fill. That gives us better ability to entertain something that might not fit cleanly into a traditional bucket, and because of the governance, it lets us get it done.

Another part of it is our mission. I think it appeals to people that we're able to help people around the world, year in and year out. If an asset manager has limited capacity to accept new money from an asset allocator, they can choose to work with a private foundation. If they're successful meeting their return goals and targets, then they're helping the foundation achieve their mission and that is something they can feel good about.  

Trusted Insight: How has your approach to institutional investment evolved over your career?

Shawn Wischmeier: I think the majority of us -- those with no hair or grey hair -- realize it’s about the quality of the investment managers, in addition to our internal team. I would say it's critically important that you have ethical, smart and motivated partners on the other side of the table.

We always prefer working with investment managers who are not worried about their fourth vacation home or their G6 to get them back and forth. We put an inordinate amount of focus on making sure that we feel really good about who we're working with. It's not enough just to have a good strategy and be in a good space.

When things go wrong, and they sometimes will, it’s critical to have a great partner. You don't want to be referring back to legal documents to understand your rights. You want to know that you have a strong relationship with those individuals, and that they're going to treat you well and treat you right, and you can call them up to work to a mutually beneficial solution. If you don't have good people on the other side, you may end up in a bad, protracted situation.

It is also critical that the other investors in any commingled investments are similarly thoughtful and sophisticated. Limited partners that have goals that might be short-term in nature, may not match our ability to truly be long-term. An example of that is during the downturn, LPs tell their GPs not to call capital because they had liquidity problems. LPs needed to hold onto their money to pay the bills. During that period, I was in the state of Indiana, we were very liquid and we wanted them to buy everything that wasn't nailed down. We noticed that with some GPs you might have a situation where they're listening too much to a few very large or influential LPs, possibly at the detriment of what's in the best interest of the fund.

Trusted Insight: There’s a huge pool of asset managers to pick from. How do you weed out the good from the great?

Shawn Wischmeier: Most asset allocators believe they are good at manager selection; however, selecting quality managers is very hard. Some allocators may confuse luck for skill.

We try to kiss a lot of frogs. We generally try to meet with anybody and everybody. We can't always, given all the thousands of opportunities out there at any given moment. We're a team of 12, including myself, so it is impossible to cover the entire globe. By meeting with a large cross-section of managers, however, its helps us to better understand the distribution of talent available and make better informed decisions on managers.

I think some people can make the error of only trying to look at what they deem to be the better managers, and then they cut off the tail. We believe that you have to build a good mental distribution of what's available in each and every asset class, sub-asset class, investment strategy and investment type. You also need to know what defines bad or really bad and what defines good or really good.

So, we study, study, study. Measure twice, cut once. We work really hard to understand who's out there, why they're out there, and then we'll make a selection based on our experience. Our goal is to be right more often than wrong. If we take equal or similar-sized risk bets, and are correct about managers and investment opportunities more often than we are wrong, we're going to win over time and add a lot of value. We understand that we're going to make errors like other people. However, if you have the right partners, you can work through about any situation, even when the investment does not go as originally planned.

The key is simply to be right enough times more than you're wrong, take the right size bets, and that's very accretive. You'll make a lot of money over time if you stay disciplined in your selection process. Slow and steady will win the race over our long-term time horizon.

Trusted Insight: In private markets, where are you investing? Big-name firms? Niche strategies? New managers?

Shawn Wischmeier: The answer to that is yes, yes and yes. We are asked all of the time, “What are you looking for?" Our answer is that we're always open to all ideas, in all geographies, all industries and at all risk-return target levels. We focus on building a highly diversified portfolio and that requires a significant number of unique or uncorrelated investment ideas.

We may shy away from a couple of very specific areas over time. But in general, we're always open, we're always interested. Our primary strategy is to work harder than anybody else.

We consider almost any type of investment. Do we seed some managers? Yes. Do we take ownership in some managers? Yes. Do we do structured accounts with some managers? Yes. Do we make direct investments into equity platforms? Yes. Do we do co-investments? Yes. We'll do all the above. Are we in Asia? Are we in South America? Are we in Canada? To all those things, yes, yes and yes. The goal is to make money wherever and however we can, and to do it in a way that's copacetic with our mission. We're willing to invest in a wide array of strategies, and we have the governance that will support us in such decisions, which is key.


To learn more about foundation investing, click here to view the complete list of Top 30 Foundation Chief Investment Officers. 

You can view our full catalogue of interviews with institutional investors here.