Erik Lundberg was recently named to Trusted Insight’s ranked list of the Top 30 Endowment Chief Investment Officers. He graciously spoke with Trusted Insight on March 2, 2016. The following interview has been edited and condensed for clarity.
Erik Lundberg is the chief investment officer at University of Michigan, which has $10B in assets under management. He holds an MBA in international business and finance from Ohio State University and a bachelor's degree in business administration from University of Wisconsin. Following university, he served as an investment officer at the Ameritech pension fund, before joining the University of Michigan as its chief investment officer.
Trusted Insight: You have an impressive career trajectory. What attracted you to the world of endowment investing?
Erik Lundberg: Investing in itself is a fascinating activity, and being able to invest for a University where the end results pay off in social good makes it especially attractive.
Trusted Insight: How has your broad investment background helped you in your career?
Erik Lundberg: I always wanted to be a generalist. I wanted to know something about all the asset classes. I was initially in a structure that was very siloed. It's typical at many pension funds and endowments for you to work one area - it could be private equity, equity, bonds.
I got myself into a position where I ended up being an investment strategist and worked across the asset classes to figure out how the different asset classes worked together. We had excellent people that did a nice job of managing those individual asset classes. We had to find a method to manage the entire portfolio and not just the individual asset classes. I was drawn to that, to look at all the asset classes, and that's what helped me get the CIO job at Michigan.
Trusted Insight: From your experience of working within both pensions and endowments, in what ways do their approaches to portfolio management differ?
Erik Lundberg: There are several differences between working for a pension fund and working for an endowment. The biggest one is the idea that a pension fund is a pool of assets set aside to fund a liability. It's usually a liability that the senior management of the company would rather not have. Managing the pension fund is an activity that's big, sometimes dominating, and costs a lot of money. It's not core to the business. It's really just to fund a liability. That creates a different mindset, a different dynamic, compared to managing endowments.
We think we're lucky to have an endowment. Having an endowment helps us to do great things as a University that we otherwise would not be able to do. Everybody, including the investment team, university staff, the Regents and the President and alumni are trying to maximize this tremendous asset that we have, with the aim that the University of Michigan can be an even greater university. Instead of being bothered by having this investment function, people are happy that we're in the position to be able to have an endowment. So there's a lot of effort going into making sure that the endowment is supported and invested very well.
Trusted Insight: During your career journey, have there been any individuals who influenced on your portfolio philosophy?
Erik Lundberg: It's important to have some individuals that you can model yourself after for their way of thinking or behaving. And also to find people that you can use as a sounding boards for ideas. It's just too difficult to do it all by yourself. The best piece of advice I’ve been given is “Don't be afraid to have some views.”
Trusted Insight: The University of Michigan's endowment fund under your leadership presents some pretty impressive returns: 10% for the decade leading up to 2014. What has been your driving portfolio management strategy in securing those returns?
Erik Lundberg: Well, what's clearly been driving these portfolio returns is the hard work of our investment staff. They have built up terrific investment programs in venture capital, real estate, private equity and absolute return. And by focusing more on the alternatives rather than the traditional investment vehicles. It takes a long time to build up these investment portfolios, and their hard work has really paid off with great results.
Trusted Insight: How is the investment team structured?
Erik Lundberg: There are fourteen investment professionals, including myself. I think we're characterized by having fairly long tenures at Michigan, so we are given time to build up the programs. We also have a great staff of junior investment analysts who help with providing the necessary management analytics for us to manage this amount of money with a relatively small staff. We staff fairly traditionally, but compared to other endowments we may have a larger portion of junior investment staff.
Trusted Insight: About 60 percent of your investments are in alternative assets, which is quite unique compared to peer endowment funds. Is there anything in particular that you think is beneficial when you compare alternative assets to traditional assets?
Erik Lundberg: If you invest in alternatives right you end up with much better results, much greater performance. But those programs have to be built up over time with the best relationships. You have to find ways to invest and work with the top-tier fund managers. These are the people who actually can create value and can recognize a great value, rather than just put money to work in the asset class. Otherwise, you might as well just buy stocks.
Trusted Insight: In terms of building those relationships, what do you look for in a good manager?
Erik Lundberg: We look for an ability to create value and do something with an asset. Be it a company, an idea or a property. Someone who can take an investment and build it up to something that's worth more than where they started out. It’s about finding people who can recognize value in an asset and be actively involved in realizing that value.
Trusted Insight: Given the current volatility, how are you going to adapt your portfolio strategy over the coming years?
Erik Lundberg: A lot of assets, particularly publicly-traded assets, are very expensive right now. Looking forward, it's hard to see how we're going to generate great returns out of traditional investments such as stocks and bonds over the next five-to-seven years. So we have to find investments where we can get returns that are greater than what's available in the public market.
Trusted Insight: Is there anywhere else that you think is particularly exciting to invest in at the moment?
Erik Lundberg: There are opportunities emerging from the changes in the capital markets, such as the banking disruption, where financing traditionally done by the banks is transitioning to the private sector. Another area where you can create value is venture capital, which will continue to be great place to invest from all the innovation that's taking place, if we can tap into the right ideas. There's also a lot more of a focus on getting returns from spreads rather than market direction.
Trusted Insight: You also invest a lot in emerging markets, such as China. Are you still positive about the prospects available in those areas?
Erik Lundberg: China is clearly a big market and very influential. We've been invested in China for a while, and we try to access that through the private market more than the public market, through funding innovation in China. We still think that China is a large market and is growing, maybe at a lower rate than it used to, but still at a pretty good clip.
Trusted Insight: What has been the best portfolio investment decision that you and your team have made to date? Is there any investment in particular where you think you have done really well?
Erik Lundberg: There are many, but then there are also some that we are not so proud of. That goes with terrain. I think we have built up some great programs over time in venture capital, hedge funds and private equity. It’s a solid portfolio, and overall that’s probably our biggest achievement.
Trusted Insight: What makes the University of Michigan endowment stand out in comparison to your peers?
Erik Lundberg: It's the University of Michigan, so that makes us stand out just there. Leaders and best. We also have a really terrific investment advisory committee and a very supportive university administration. The President and the Regents have been very supportive of our effort, and help us to focus on investing the endowment for great returns.
Trusted Insight: What's the number one lesson that you've learned from your career as an institutional investor that you might give to someone of the next generation?
Erik Lundberg: Find a way to get a broad base of experiences early on, rather than just focusing on one area. If you want to be a CIO, you need to know something about all the asset classes. That's what we do with the investment analysts at the university; when they come in, we rotate them around into different asset classes over the years. They get a broad base of experiences. Later, when they end up having to focus most of their time on one asset class, they also have an ability to relate to what's going on in all other asset classes.
Trusted Insight: Aside from investment, what gets you out of bed in the morning?
Erik Lundberg: Well, investments are my hobby as well. But I also like to go skiing once in awhile. I've got a great wife and kids, and I'm lucky that they like to go skiing too. So we actually get to go a few times a year, but mostly out west. The mountains aren’t big enough in Michigan!
To learn more about the the Top 30 Endowment Chief Investment Officers, click here.
Erik Lundberg is the chief investment officer at University of Michigan, which has $10B in assets under management. He holds an MBA in international business and finance from Ohio State University and a bachelor's degree in business administration from University of Wisconsin. Following university, he served as an investment officer at the Ameritech pension fund, before joining the University of Michigan as its chief investment officer.
Trusted Insight: You have an impressive career trajectory. What attracted you to the world of endowment investing?
Erik Lundberg: Investing in itself is a fascinating activity, and being able to invest for a University where the end results pay off in social good makes it especially attractive.
Trusted Insight: How has your broad investment background helped you in your career?
Erik Lundberg: I always wanted to be a generalist. I wanted to know something about all the asset classes. I was initially in a structure that was very siloed. It's typical at many pension funds and endowments for you to work one area - it could be private equity, equity, bonds.
I got myself into a position where I ended up being an investment strategist and worked across the asset classes to figure out how the different asset classes worked together. We had excellent people that did a nice job of managing those individual asset classes. We had to find a method to manage the entire portfolio and not just the individual asset classes. I was drawn to that, to look at all the asset classes, and that's what helped me get the CIO job at Michigan.
Trusted Insight: From your experience of working within both pensions and endowments, in what ways do their approaches to portfolio management differ?
Erik Lundberg: There are several differences between working for a pension fund and working for an endowment. The biggest one is the idea that a pension fund is a pool of assets set aside to fund a liability. It's usually a liability that the senior management of the company would rather not have. Managing the pension fund is an activity that's big, sometimes dominating, and costs a lot of money. It's not core to the business. It's really just to fund a liability. That creates a different mindset, a different dynamic, compared to managing endowments.
We think we're lucky to have an endowment. Having an endowment helps us to do great things as a University that we otherwise would not be able to do. Everybody, including the investment team, university staff, the Regents and the President and alumni are trying to maximize this tremendous asset that we have, with the aim that the University of Michigan can be an even greater university. Instead of being bothered by having this investment function, people are happy that we're in the position to be able to have an endowment. So there's a lot of effort going into making sure that the endowment is supported and invested very well.
Trusted Insight: During your career journey, have there been any individuals who influenced on your portfolio philosophy?
Erik Lundberg: It's important to have some individuals that you can model yourself after for their way of thinking or behaving. And also to find people that you can use as a sounding boards for ideas. It's just too difficult to do it all by yourself. The best piece of advice I’ve been given is “Don't be afraid to have some views.”
Trusted Insight: The University of Michigan's endowment fund under your leadership presents some pretty impressive returns: 10% for the decade leading up to 2014. What has been your driving portfolio management strategy in securing those returns?
Erik Lundberg: Well, what's clearly been driving these portfolio returns is the hard work of our investment staff. They have built up terrific investment programs in venture capital, real estate, private equity and absolute return. And by focusing more on the alternatives rather than the traditional investment vehicles. It takes a long time to build up these investment portfolios, and their hard work has really paid off with great results.
Trusted Insight: How is the investment team structured?
Erik Lundberg: There are fourteen investment professionals, including myself. I think we're characterized by having fairly long tenures at Michigan, so we are given time to build up the programs. We also have a great staff of junior investment analysts who help with providing the necessary management analytics for us to manage this amount of money with a relatively small staff. We staff fairly traditionally, but compared to other endowments we may have a larger portion of junior investment staff.
Trusted Insight: About 60 percent of your investments are in alternative assets, which is quite unique compared to peer endowment funds. Is there anything in particular that you think is beneficial when you compare alternative assets to traditional assets?
Erik Lundberg: If you invest in alternatives right you end up with much better results, much greater performance. But those programs have to be built up over time with the best relationships. You have to find ways to invest and work with the top-tier fund managers. These are the people who actually can create value and can recognize a great value, rather than just put money to work in the asset class. Otherwise, you might as well just buy stocks.
Trusted Insight: In terms of building those relationships, what do you look for in a good manager?
Erik Lundberg: We look for an ability to create value and do something with an asset. Be it a company, an idea or a property. Someone who can take an investment and build it up to something that's worth more than where they started out. It’s about finding people who can recognize value in an asset and be actively involved in realizing that value.
Trusted Insight: Given the current volatility, how are you going to adapt your portfolio strategy over the coming years?
Erik Lundberg: A lot of assets, particularly publicly-traded assets, are very expensive right now. Looking forward, it's hard to see how we're going to generate great returns out of traditional investments such as stocks and bonds over the next five-to-seven years. So we have to find investments where we can get returns that are greater than what's available in the public market.
Trusted Insight: Is there anywhere else that you think is particularly exciting to invest in at the moment?
Erik Lundberg: There are opportunities emerging from the changes in the capital markets, such as the banking disruption, where financing traditionally done by the banks is transitioning to the private sector. Another area where you can create value is venture capital, which will continue to be great place to invest from all the innovation that's taking place, if we can tap into the right ideas. There's also a lot more of a focus on getting returns from spreads rather than market direction.
Trusted Insight: You also invest a lot in emerging markets, such as China. Are you still positive about the prospects available in those areas?
Erik Lundberg: China is clearly a big market and very influential. We've been invested in China for a while, and we try to access that through the private market more than the public market, through funding innovation in China. We still think that China is a large market and is growing, maybe at a lower rate than it used to, but still at a pretty good clip.
Trusted Insight: What has been the best portfolio investment decision that you and your team have made to date? Is there any investment in particular where you think you have done really well?
Erik Lundberg: There are many, but then there are also some that we are not so proud of. That goes with terrain. I think we have built up some great programs over time in venture capital, hedge funds and private equity. It’s a solid portfolio, and overall that’s probably our biggest achievement.
Trusted Insight: What makes the University of Michigan endowment stand out in comparison to your peers?
Erik Lundberg: It's the University of Michigan, so that makes us stand out just there. Leaders and best. We also have a really terrific investment advisory committee and a very supportive university administration. The President and the Regents have been very supportive of our effort, and help us to focus on investing the endowment for great returns.
Trusted Insight: What's the number one lesson that you've learned from your career as an institutional investor that you might give to someone of the next generation?
Erik Lundberg: Find a way to get a broad base of experiences early on, rather than just focusing on one area. If you want to be a CIO, you need to know something about all the asset classes. That's what we do with the investment analysts at the university; when they come in, we rotate them around into different asset classes over the years. They get a broad base of experiences. Later, when they end up having to focus most of their time on one asset class, they also have an ability to relate to what's going on in all other asset classes.
Trusted Insight: Aside from investment, what gets you out of bed in the morning?
Erik Lundberg: Well, investments are my hobby as well. But I also like to go skiing once in awhile. I've got a great wife and kids, and I'm lucky that they like to go skiing too. So we actually get to go a few times a year, but mostly out west. The mountains aren’t big enough in Michigan!
To learn more about the the Top 30 Endowment Chief Investment Officers, click here.