Tim Milanich is the chief investment officer at Case Western Reserve University. He has served the organization since 2007 and held the titles of deputy CIO and director of private investments. In this interview, he tells us how a third of the endowment's assets are illiquid in nature; how they have institutionalized their infrastructure over the years; and the importance of stress testing and actively rebalancing the portfolio during good times and bad times.
Tim Milanich was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Can you tell us about Case Western Reserve University and its investment office division.
Tim Milanich: Case Western Reserve University’s roots date back to 1826. It was initially called Western Reserve College and was based in Hudson, Ohio, which is about 30 miles south of Cleveland. As the 20th century neared, Cleveland was a city on the rise, from both a population and a financial perspective. An industrialist named Amasa Stone helped fund the move from Hudson to its current location in Cleveland. Around the same time, a philanthropist named Leonard Case laid the groundwork for a polytechnic school in Cleveland, Case School of Applied Science, which launched in 1880. Eventually, both these schools occupied land right next to each other, but they remained separate institutions. They eventually joined through a federation in 1967.
The endowment dates all the way back to 1836, but what I will call the ‘modern Endowment’ dates back two CIO’s to Bill Rose in 1996. Bill was both the Treasurer and Chief Investment Officer at that time. We still have many handwritten records from Bill on his famous graph paper going back over 20 years. I was hired by Sally Staley, whom Bill had hired in 2002 to complement the team as it grew. Sally was named CIO in 2006 and the University split the CIO and Treasurer roles.
The Endowment was obviously much different than what it looks like today. In the beginning, it was more of a stock and bond portfolio, but Bill was one of the first to start making investments in hedge funds and private equity. I joined 13 years ago, as director of privates. About a third of the assets in Case Western Reserve’s endowment are illiquid in nature. They include all varieties of private equity, as well as real assets. When I joined, I was the privates person. The publics person was Jason Hart. Everything was basically managed within those two sleeves.
Three years ago, after a long and successful tenure, Sally retired and the school had me step in on an interim basis at first, and then I got the position permanently. Like most transitions, the existing team had some ideas on changes to the portfolio, everything from strategy to individual managers to asset allocation. We knew we needed to make changes to the infrastructure of the office, which is all the systems and processes. And third, we needed to make changes to the team. I felt that we had become too siloed in the past structure and wanted to have everyone on the proverbial same page, therefore, the transition to more a generalist approach. It’s a lot of ground to cover, but I felt we had the right team here to make it happen.
Over the last three years, those were the three big initiatives that we've been working on. I'll quickly go through each of them. First, our equity book and our absolute return book (liquid assets) needed some attention. There was a lot of passive exposure, and we wanted to have a bit more active management. All in all, we shifted almost $600M of exposure between exposures/managers.
Then we set out to institutionalize our infrastructure. We wanted greater efficiencies in our systems. We replaced our custodian. We replaced our risk management systems, our portfolio management systems, and our analytics. We literally have all new products and they're cloud-based, which by the way has been great for a time like this. I have to give credit to the team here, who were on the team for many years before Sally left and were instrumental in revamping the Investment office.
We started to hit bandwidth constraints as we had some turnover in the team and knew we needed some more help. We brought an analyst aboard two years ago. He is doing great in what I would call a utility analyst role. In a small team, you get to learn a little bit about everything and understand the organization from the ground up. We also brought aboard another Director level hire from another university endowment. Today, our endowment is valued at about $1.5 billion. Our broad asset allocation is 40% to equities, and 20% in private equity. So think of that as 60% equity-oriented. Absolute Return is 20% of our asset allocation and that’s what we call the rudder in the portfolio. We expect this asset class to do well during good times and bad. And boy has it been tested in these volatile markets. The final 20% is made up of cash, fixed income, and some real asset strategies.
Trusted Insight: How does what's happening now in the market and the uncertainty going forward affect your strategic asset allocation strategy? How do you rethink that?
Tim Milanich: We were a little bit more defensively postured coming into this. We feel like the boy who cried wolf, because we’d been telling our investment committee for the better part of two years that we really felt the markets would tail off. We just didn't know when. We thought that something could happen—but nothing like this. This is well beyond the scope of what the scenarios we imagined.
What I can tell you is that during the 2008 global financial crisis (GFC), we realized we didn't really have a game plan for something like that and we got stung a little. We didn't watch liquidity as much as we should have. We took some of the lessons learned from that time and brought them forward to today. I actually just ran through this with our investment committee. We meet 4 times a year, but we held an interim meeting so that everybody could have the most up-to-date information. We want to be as transparent and proactive as we can be during this time.
At the same time we're playing defense, we also want to play offense. We have been actively rebalancing the portfolio, in good times and bad. We are constantly debating internally the seemingly disconnect today between the financial markets and the economy. We need to be prepared for a variety of outcomes. We need to be prepared to rebalance the portfolio at stress points and be consistent in our approach unless the data tells us otherwise. But at the same time, we have to pay attention to the needs of the institution.
Trusted Insight: CIOs say one of the biggest problems during the GFC was liquidity constraints. Was that a similar challenge for the University?
Tim Milanich: Yes, no question. I was at CWRU for the GFC and this is my third crisis. I was out of school for a couple of years when the tech meltdown happened in 1999-2000. During the GFC, we didn't have a game plan. We wanted to do some things on the distressed side, but we literally didn't have the money to do much at all. We were very concerned about whether we were going to be able to make the payment to the school, and wondered if we’d have to cut equities at the same time they were going up.
What I'll tell you is that we actually just got a line of credit in January. I talked to the investment committee and said, “The banks are hounding us for business and lines of credit are so inexpensive. I know we don't need it today. We have 3-4% cash. But just in case, why don't we have access to one?” We haven't had to access it, but we sleep a little bit better knowing that we have access to cash just in case we want to be able to rebalance the portfolio, or even go to an overweight position. Having those options is the reason we got it. We're pretty happy with where we are today. We don't know what's going to happen around the bend, but we feel like we are prepared for a variety of outcomes.
Trusted Insight: Now investors are adapting to communication means like Zoom and others. How has that adaptation been to your day to day in collaborating with your peers?
Tim Milanich: This was completely new to me. I'm used to getting up in the morning and going into the office. That's what I do, but things are different now. I’ve been talking to a lot of our peers. Between email, Zoom, and texting, I’m probably connecting with peers more often than I ever have before. Now is an interesting time, because we're all looking at different opportunities and we're reaching out to our networks. These are folks that we've known for many years, folks that we know are in a bunch of funds that we are invested with. We feel that we are collaborative folks and always happy to chat about due diligence on managers.
One of the interesting aspects of this crisis is whether you can do due diligence on Zoom in an afternoon, and come away feeling the same as if you met somebody in person. There's a lot of mannerisms that you're going to catch in person that you're not going to catch on something like Zoom or through teleconference. In the past, if a great opportunity comes along with a highly regarded/wish list manager, we could just get on a flight and be there the next day if we needed to mobilize that fast. Today, it's not feasible. Doing Zoom calls to check references—that's completely fine. I don't know if I could get comfortable with meeting somebody on Zoom for an hour and making any kind of decision-based on that. If we're going to be in a situation like this for the next six months to a year, then we might have to evolve our thinking.
Trusted Insight: Can you share more about your approach to the venture capital asset class?
Tim Milanich: I'll give you a quick history of our venture book. When I came aboard, our performance in the VC asset class was middle of the road, and agreed that we would not make any more investments until we had a well thought out strategy. In 2012, I happened to meet someone on the seed-stage side: Chris Douvos, formerly of VIA, which is now called Ahoy. We talked a lot about going in early—about how seed is the new A, about how ownership matters, and about the importance of portfolio construction to have the ability to fund a company through multiple rounds. Chris and I had some great conversations and ended up being one of his first limited partners, and we still have a relationship with Chris today.
We've done a lot of direct ideas on the early-stage side, some funds on the later-stage side, and everything in between. Our initial idea, in 2012, was to plan for seed-stage venture to be 5% or 10% of our entire private equity book. That way it was meaningful enough to move the needle if performance was good. But if something didn't work out, it wouldn't wipe us out. We ended up doing really well.
Right now we’re toggling between two commitments on the venture side. If you were to look across our entire private equity portfolio today, you'd see that VC is close to 45%. If you'd have asked me five years ago if I thought it was going to be that large, I'd probably have said no. But buyouts and growth equity have a good distribution pace, and venture just hasn't quite gotten there yet. This venture allocation percentage wasn’t necessarily in our plan—but it's a good problem to have when you invest in a fund and then it's worth 3x on paper. We obviously like realized results better than unrealized but so far so good. We will remain active investors in technology and the new staff on the team has already brought some great relationships to the table.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.
Tim Milanich was named on Trusted Insight's 2020 Top 30 Endowment Chief Investment Officers.
Trusted Insight: Can you tell us about Case Western Reserve University and its investment office division.
Tim Milanich: Case Western Reserve University’s roots date back to 1826. It was initially called Western Reserve College and was based in Hudson, Ohio, which is about 30 miles south of Cleveland. As the 20th century neared, Cleveland was a city on the rise, from both a population and a financial perspective. An industrialist named Amasa Stone helped fund the move from Hudson to its current location in Cleveland. Around the same time, a philanthropist named Leonard Case laid the groundwork for a polytechnic school in Cleveland, Case School of Applied Science, which launched in 1880. Eventually, both these schools occupied land right next to each other, but they remained separate institutions. They eventually joined through a federation in 1967.
"About a third of the assets in Case Western Reserve’s endowment are illiquid in nature. They include all varieties of private equity, as well as real assets."
The endowment dates all the way back to 1836, but what I will call the ‘modern Endowment’ dates back two CIO’s to Bill Rose in 1996. Bill was both the Treasurer and Chief Investment Officer at that time. We still have many handwritten records from Bill on his famous graph paper going back over 20 years. I was hired by Sally Staley, whom Bill had hired in 2002 to complement the team as it grew. Sally was named CIO in 2006 and the University split the CIO and Treasurer roles.
The Endowment was obviously much different than what it looks like today. In the beginning, it was more of a stock and bond portfolio, but Bill was one of the first to start making investments in hedge funds and private equity. I joined 13 years ago, as director of privates. About a third of the assets in Case Western Reserve’s endowment are illiquid in nature. They include all varieties of private equity, as well as real assets. When I joined, I was the privates person. The publics person was Jason Hart. Everything was basically managed within those two sleeves.
Three years ago, after a long and successful tenure, Sally retired and the school had me step in on an interim basis at first, and then I got the position permanently. Like most transitions, the existing team had some ideas on changes to the portfolio, everything from strategy to individual managers to asset allocation. We knew we needed to make changes to the infrastructure of the office, which is all the systems and processes. And third, we needed to make changes to the team. I felt that we had become too siloed in the past structure and wanted to have everyone on the proverbial same page, therefore, the transition to more a generalist approach. It’s a lot of ground to cover, but I felt we had the right team here to make it happen.
"We set out to institutionalize our infrastructure... We literally have all new products and they're cloud-based, which by the way has been great for a time like this."
Over the last three years, those were the three big initiatives that we've been working on. I'll quickly go through each of them. First, our equity book and our absolute return book (liquid assets) needed some attention. There was a lot of passive exposure, and we wanted to have a bit more active management. All in all, we shifted almost $600M of exposure between exposures/managers.
Then we set out to institutionalize our infrastructure. We wanted greater efficiencies in our systems. We replaced our custodian. We replaced our risk management systems, our portfolio management systems, and our analytics. We literally have all new products and they're cloud-based, which by the way has been great for a time like this. I have to give credit to the team here, who were on the team for many years before Sally left and were instrumental in revamping the Investment office.
We started to hit bandwidth constraints as we had some turnover in the team and knew we needed some more help. We brought an analyst aboard two years ago. He is doing great in what I would call a utility analyst role. In a small team, you get to learn a little bit about everything and understand the organization from the ground up. We also brought aboard another Director level hire from another university endowment. Today, our endowment is valued at about $1.5 billion. Our broad asset allocation is 40% to equities, and 20% in private equity. So think of that as 60% equity-oriented. Absolute Return is 20% of our asset allocation and that’s what we call the rudder in the portfolio. We expect this asset class to do well during good times and bad. And boy has it been tested in these volatile markets. The final 20% is made up of cash, fixed income, and some real asset strategies.
Trusted Insight: How does what's happening now in the market and the uncertainty going forward affect your strategic asset allocation strategy? How do you rethink that?
Tim Milanich: We were a little bit more defensively postured coming into this. We feel like the boy who cried wolf, because we’d been telling our investment committee for the better part of two years that we really felt the markets would tail off. We just didn't know when. We thought that something could happen—but nothing like this. This is well beyond the scope of what the scenarios we imagined.
"We care about the liquidity needs of the institution. We also care about liquidity for our portfolio, and we do a lot of stress testing to get a sense of that."
What I can tell you is that during the 2008 global financial crisis (GFC), we realized we didn't really have a game plan for something like that and we got stung a little. We didn't watch liquidity as much as we should have. We took some of the lessons learned from that time and brought them forward to today. I actually just ran through this with our investment committee. We meet 4 times a year, but we held an interim meeting so that everybody could have the most up-to-date information. We want to be as transparent and proactive as we can be during this time.
We care about the liquidity needs of the institution. We have a payout rate that we need to give to the university. We also care about liquidity for our portfolio, and we do a lot of stress testing to get a sense of that. We're running daily/weekly cash flow models to see where we are. A lot of oversight has gone into our existing portfolios, existing managers, and existing exposures, to get a better idea of what's going on. With illiquid strategies, sometimes you don't know what the market will ultimately be like. We have to stress-test around how bad some public market comps are doing."We have been actively rebalancing the portfolio, in good times and bad. We are constantly debating internally the seemingly disconnect today between the financial markets and the economy."
At the same time we're playing defense, we also want to play offense. We have been actively rebalancing the portfolio, in good times and bad. We are constantly debating internally the seemingly disconnect today between the financial markets and the economy. We need to be prepared for a variety of outcomes. We need to be prepared to rebalance the portfolio at stress points and be consistent in our approach unless the data tells us otherwise. But at the same time, we have to pay attention to the needs of the institution.
Trusted Insight: CIOs say one of the biggest problems during the GFC was liquidity constraints. Was that a similar challenge for the University?
Tim Milanich: Yes, no question. I was at CWRU for the GFC and this is my third crisis. I was out of school for a couple of years when the tech meltdown happened in 1999-2000. During the GFC, we didn't have a game plan. We wanted to do some things on the distressed side, but we literally didn't have the money to do much at all. We were very concerned about whether we were going to be able to make the payment to the school, and wondered if we’d have to cut equities at the same time they were going up.
"There's a lot of mannerisms that you're going to catch in person that you're not going to catch on something like Zoom or through teleconference."
I think if you were to go back and look at our returns from that period, you can definitely see that we were very worried about liquidity and couldn’t rebalance. In March of 2009 the market took off and we were caught flat-footed. I can remember us talking about getting a line of credit then—but even if they were available, they were so prohibitively expensive.
What I'll tell you is that we actually just got a line of credit in January. I talked to the investment committee and said, “The banks are hounding us for business and lines of credit are so inexpensive. I know we don't need it today. We have 3-4% cash. But just in case, why don't we have access to one?” We haven't had to access it, but we sleep a little bit better knowing that we have access to cash just in case we want to be able to rebalance the portfolio, or even go to an overweight position. Having those options is the reason we got it. We're pretty happy with where we are today. We don't know what's going to happen around the bend, but we feel like we are prepared for a variety of outcomes.
Trusted Insight: Now investors are adapting to communication means like Zoom and others. How has that adaptation been to your day to day in collaborating with your peers?
Tim Milanich: This was completely new to me. I'm used to getting up in the morning and going into the office. That's what I do, but things are different now. I’ve been talking to a lot of our peers. Between email, Zoom, and texting, I’m probably connecting with peers more often than I ever have before. Now is an interesting time, because we're all looking at different opportunities and we're reaching out to our networks. These are folks that we've known for many years, folks that we know are in a bunch of funds that we are invested with. We feel that we are collaborative folks and always happy to chat about due diligence on managers.
One of the interesting aspects of this crisis is whether you can do due diligence on Zoom in an afternoon, and come away feeling the same as if you met somebody in person. There's a lot of mannerisms that you're going to catch in person that you're not going to catch on something like Zoom or through teleconference. In the past, if a great opportunity comes along with a highly regarded/wish list manager, we could just get on a flight and be there the next day if we needed to mobilize that fast. Today, it's not feasible. Doing Zoom calls to check references—that's completely fine. I don't know if I could get comfortable with meeting somebody on Zoom for an hour and making any kind of decision-based on that. If we're going to be in a situation like this for the next six months to a year, then we might have to evolve our thinking.
Trusted Insight: Can you share more about your approach to the venture capital asset class?
Tim Milanich: I'll give you a quick history of our venture book. When I came aboard, our performance in the VC asset class was middle of the road, and agreed that we would not make any more investments until we had a well thought out strategy. In 2012, I happened to meet someone on the seed-stage side: Chris Douvos, formerly of VIA, which is now called Ahoy. We talked a lot about going in early—about how seed is the new A, about how ownership matters, and about the importance of portfolio construction to have the ability to fund a company through multiple rounds. Chris and I had some great conversations and ended up being one of his first limited partners, and we still have a relationship with Chris today.
We've done a lot of direct ideas on the early-stage side, some funds on the later-stage side, and everything in between. Our initial idea, in 2012, was to plan for seed-stage venture to be 5% or 10% of our entire private equity book. That way it was meaningful enough to move the needle if performance was good. But if something didn't work out, it wouldn't wipe us out. We ended up doing really well.
Right now we’re toggling between two commitments on the venture side. If you were to look across our entire private equity portfolio today, you'd see that VC is close to 45%. If you'd have asked me five years ago if I thought it was going to be that large, I'd probably have said no. But buyouts and growth equity have a good distribution pace, and venture just hasn't quite gotten there yet. This venture allocation percentage wasn’t necessarily in our plan—but it's a good problem to have when you invest in a fund and then it's worth 3x on paper. We obviously like realized results better than unrealized but so far so good. We will remain active investors in technology and the new staff on the team has already brought some great relationships to the table.
View our full catalog of interviews here.
The full list of 2020 Top 30 Endowment Chief Investment Officers can be found here.