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Exclusive Q&A: Jonathan Hook, CIO At The Weinberg Foundation

by trusted insight posted 6years ago 5640 views

Jonathan Hook is the chief investment officer at the Harry and Jeanette Weinberg Foundation, which leverages its $2.13 billion in assets under management to help the poor and needy. Previously, Hook served as the chief investment officer of Ohio State University and Baylor University, his graduate school alma mater.

Hook was recently named on Trusted Insight’s ranked list of the Top 30 Chief Investment Officers At Foundations. He graciously spoke with Trusted Insight on Oct. 28. The following interview has been edited and condensed for clarity.

Trusted Insight: Could you please tell me more about yourself and how you got involved in the Weinberg Foundation?

Jonathan Hook: After a 20-year career in banking, I shifted gears and moved to the endowment space, first with Baylor University, which was my alma mater for graduate school. I was there building its investment office from 2001 to 2008.

In 2008, I was asked to take the job at Ohio State University, a larger endowment that also had not had an investment office. A new president came in, and he wanted to build a team and start an investment program at that school. I got in, created that program, built the team, et cetera.

At the end of 2013, the Foundation approached me. They had never had an internal investment staff. The founder, up until his death in 1990, had managed all the assets for the foundation. For the last 25 years they had done different things and tried active, tried passive, tried outsourcing, and the foundation board decided to move forward with building a staff internally. I was asked to take a look at it, and as I approached the opportunity, it sounded interesting.

One thing I do like is the actual starting up and building the investment office from scratch. This is my third time starting a new investment office. There may be a little bit of serial entrepreneur in me.

Trusted Insight: You were the CIO for Baylor and Ohio State. In what ways does foundation investing differ from the endowment industry that you found surprising?

Jonathan Hook: I don’t know if it surprised me so much, but I think one of the things that we were very quick to get our hands around was the notion of liquidity. 

With a University, there are typically sources of cash flow coming in from donations to the school and possibly some other inflows. With the foundation, for good or for bad, that does not exist. We don’t solicit new gifts.

It is all about funding the mission. Our mission is to help support the poor and needy, not only of Baltimore but throughout Maryland and in other regions, both in the U.S. and internationally.

There’s no new cash flow coming in to the foundation. Liquidity and the notion of how devastating a loss can be is one very big difference from the university world. The ability to bounce back is not quite as great since there is no cash inflow. As we’ve looked at building the portfolio and changing some things around, we have been very mindful of that issue.

Another thing that was a pleasant surprise was the fact the foundation has been so easy to navigate.  Our head office is in Baltimore, but we also have an office in Hawaii. We have a property management team of 17 that focuses on the properties we own in the Hawaiian Islands, and we have 31 people here at the head office. At the Foundation, has been much easier to get things done and there has been much less bureaucracy than the typical university. It allows us to be a bit more flexible and to have the ability to move a bit more quickly when it’s warranted.

Trusted Insight: Please tell me about your investment team. What was your strategy for building a team from scratch?

Jonathan Hook: What the board of trustees and I discussed was to focus on building a small team that could be nimble, be mindful of the expense side, yet still robust enough to handle the task ahead. We initially set out with a goal of building a team of four.

I started at the end of May 2014, and a couple of months later David Gilmore, who had been a colleague at Ohio State, came on board. David and I worked well together at Ohio State, and we thought that could continue if everything played out the way we hoped. David helped run the hedge fund and the liquid asset portfolio in Columbus. 

One of the things that was obvious was we weren’t going to focus on a lot of private capital opportunities to start with, largely because of the foundation’s operating real estate exposure. Having someone with good experience and good manager knowledge on the liquid side made sense with respect to the first addition.

David came on board two months after I got here, and then the two of us were the entire team up until about five months ago, when we hired an executive assistant. Subsequently, we brought in an analyst who had been at the University of Cincinnati, Brian Clark. Brian joined us in the fall and has immediately made a positive difference in helping us with some things that were impossible with only two people. He has hit the ground running and really been a nice addition for us.

At this point, we believe this is the right size for our team. As we grow, we can re-assess. If need be we’ll make a case to hire additional team members as we move forward. At this point, we are right-sized, and we'll likely stay where we are for the foreseeable future.

Trusted Insight: Tell me about the foundation’s portfolio when you took over and how it’s changed since.

Jonathan Hook: The inherited a portfolio was essentially a hybrid outsource model. 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. 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. Out of the four, there were four very different portfolios. One engaged in a higher degree of risk management techniques, and one was very traditional. The one that held the alternatives had a little bit more capital than the others, but it held the broadest array of managers because of the additional alternatives. When you cut through it all, we had at least 120 managers in the aggregated portfolio. 

Looking one level below those four firms, each manager could either use proprietary products or third-party products. It was an extremely well-diversified mishmash when put together, but it was not really efficient. 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. 

After coming to the foundation and talking with board members and senior leadership, we focused on getting the office infrastructure created and setting up the procedures and policies by which we would operate. This was important to establish before we began to re-configure the underlying portfolio. There was going to be a high level of educational content connected to the prospective changes as well, so we could explain the rationale for the changes and educate our board as we worked through the evolution.

One important aspect of what we were starting was to create the brand name of the Weinberg Foundation in the institutional investment community. Each underlying manager we used previously knew the name of the four outsourced providers, but not the name of the ultimate client, Weinberg.

There really was no institutional knowledge of Weinberg per se. The Foundation is in the top 25 nationally of private foundations. We're large, but we're not the size of Robert Wood Johnson or some of the other very well-known foundations. We needed to be a name that is known in the institutional investing area. We engaged in an offensive campaign to get our name out to people.

Before leaving Ohio State, we had talked with several managers about reserving capacity in their funds, and now have all of those managers in the portfolio. It was a relatively short list, and they were people with whom David or I (or both of us) had relationships dating back many years. We had some very long relationships that we wanted to keep and some were newer relationships that we want to sustain. As we started rebuilding the portfolio, we've added those folks back in, essentially that list is completed now.

Taking out the four outsource providers also provided a way to reduce costs for the foundation. We believed that we could bring down our fees and operating costs as we converted our portfolio to something that looks similar to, but not exactly like, the classic “endowment model.” So far, evidence has shown that to be true. Combining that with the ability to work directly with our new manager set have both been positive outcomes.

We're still looking to re-deploy capital and thinking about how we want to do that. In terms of asset allocation policy, we designed a simple model that was easy for the trustees to grasp. We're really thinking about the world in terms of four buckets.

Global equities: Anything that’s equity oriented, be it long-only, long-biased, or long-short, goes in this bucket. This needs to be a growth engine for us.

Global credit and fixed income: Again, similar philosophy, but on the credit side. Cash, fixed income, credit-oriented hedge funds and anything that is credit driven goes in this part of the portfolio. This bucket will hold our store of liquidity as well as provide some balance to the equity book. In today’s environment we hope it can also provide a level of stability for the foundation.

Real Estate: We own a very large real estate portfolio of operating properties. It is a large part of the total portfolio, and it is managed by our team in Hawaii. It’s still part of the overall AUM, and we partner up with our Hawaiian office to incorporate that, but they manage the properties on a day-to-day basis.

The fourth bucket, which is our smallest, holds our private capital. This bucket holds our legacy private equity and will hold the new illiquid assets as we build that portion of the portfolio.  Due to the illiquid nature of our real estate and the amount of illiquidity we choose to accept in total, this piece of the portfolio will be in the building mode for some time.

We really wanted to keep it very simple and make sure that the trustees understood what we were doing, why we were doing it and spending time with them to make sure they were comfortable with the decision to bring the investment function in-house.

We think it’s going well based upon the feedback that we have received. We have the nice ability to talk everyday with at least one of our trustees and the President. Two of them sit right down the hall from me, and the president of the foundation is on the other side of their offices. It’s a very short chain of command, and the lines of communication are direct. Everyone has been exceptionally good to work with, very attentive and very good listeners as we have been working at building the portfolio into its new form.

Trusted Insight: You mentioned that if you take a loss, it hurts a lot more than it would if you were at a different type of institution. It is a particularly tough time to be an investor right now, not to mention one who must avoid major losses. Heading into 2016, where geographically are you looking for sustained growth and what sectors might drive that growth?

Jonathan Hook: From a long-term perspective, the equity side of the portfolio really needs to be the engine. That’s the area that has the best opportunity for growth.

You’re exactly right as to how difficult the environment has been, especially in the last quarter. I recently saw research from Cambridge showing no equity index in positive territory. That is a difficult environment in which to take on this portfolio challenge, but relative returns don’t pay out grants or expenses. All of us in this business work hard, and we all want our institutions to flourish, but it’s been difficult in this environment.

At the top of the list, one important aspect about our board is that they take a long-term focus. They’re not overly concerned about short-term issues or one particular quarter. They were very interested to make sure that we’re building the right process and taking the right actions and steps along the way. That is something we are very attentive to as we move forward. I think the board is comfortable that if the policies, procedures and methodologies are handled properly, then the returns will come. We have a roster of some exceptionally good managers. While the last quarter was difficult, I don’t think any of them went from being very smart to being stupid. We have been expecting a higher level of volatility, and we experienced it firsthand.

When we look at the equity portfolio and specifically the hedge funds in that part of the portfolio, we have them benchmarked against a long-only benchmark. We’re not looking for an equity hedge fund to be a market neutral manager. Each one has to perform over a full market cycle and be able to beat a long-only benchmark. That informs the type of manager in which we are interested. We’re looking for partners who can add some alpha over that full market cycle. Whether you focused on a three- or five-year period, we would expect to get some growth out of those folks.

We are still early in terms of building our international exposure and most of that is just timing. We have not had time to do much in the way of international travel yet. That will come. We have added a few European managers with whom we had previously worked. We have more work to do on the non-U.S. and EM side, and that is where we would expect to see some long-term benefits, even if not in the short run. We think there’s terrific long-term growth in other parts of the world, but it may not materialize immediately. This is an area in which we would anticipate adding exposure.

On the credit side, we think of that part of the portfolio as being liquidity-focused and making sure we have, in a worst case scenario, enough cash or near-cash set aside to cover grants even if the markets are topsy-turvy for a while. We also need to earn reasonable returns in this bucket, so we’re complementing the liquidity with a portfolio of diversified strategies. We’ll take some credit risk and add managers we think can add some nice returns without exposing us to huge amounts of risks. The credit side should be a little “less risky.” At this point in time, prior to the Fed raising rates, some people might say the credit portfolio is more risky. Thinking of it from a normalized basis, the credit side would be where we'd have lower volatility managers, generally speaking.

We still working down legacy positions. We’ve had a legacy private equity portfolio, and what we inherited will be with us for a while, but it’s not a problematic portfolio with a lot of unfunded commitments. Over time we want to add to and build up that private equity portfolio. When I say “private equity” that would include things like growth equity, buyouts, and venture. 

We think there are some great opportunities in that space and certainly the returns the last several years have been very good there. There is just not as much low-hanging fruit as we have seen over the last four-to-five years. We don’t have much in the portfolio today, and the real estate component consumes a big part of what would or could be in private strategies.

We’re having discussions with the board now in terms of strategic direction and there are more discussions at that level yet to come. In the meantime, we’ve been able to add a couple of private equity names. It has been very much a rifle-shot approach and hopefully we’ll be able to continue that, even if it’s a small amount of capital each year.

Trusted Insight: What trends have you identified that are unique to foundation investing?

Jonathan Hook: One thing that I have found here, and I can’t say that we are the same as all other foundations, is the foundation does not get distracted with a lot of noise. It’s a function of in the university world there are so many different stakeholders between alumni, faculty, administration, trustees, students, and you can probably add a few more and then break them down into many sub-groups. A university has so many different constituents that it makes the entity harder to manage. 

With the foundation, we have the ability to be very focused and not get distracted because the mission resides first and foremost with the board of trustees, and truthfully that’s the way it should be. Some of the noise and distractions can be swept aside, and issues around investing in certain industries or sectors do not distract the board.

One of the material statements that was made to me early was, “Look, our mission is to serve the poor and needy and provide services, whether it be clothing, shelter, or whatever the case might be. We don’t want you and the investment team to get distracted. Focus on making money honestly to serve the mission.” That was very clarifying for us to be told that we could focus on the true merits of any investment manager or strategy. Every investment needs to be made on its own merit. At the same time, I don’t want to say there are no political issues with which to deal, because if there is a political decision to be made, then we obviously want to communicate that to the president and the trustees. It is an environment where political circumstances do not swamp the investment thesis. It’s very much a secondary issue to making a new investment.

The other thing going back to the chain of command and communication is the visibility and ability to talk with the true fiduciaries, the trustees. It'd be very hard to think of a day I don’t talk to at least one trustee. The university model does not facilitate this quite so well. That’s not an indictment, but it's just a difference between how things are set up. We’re small enough and streamlined enough where we can make decisions very quickly.

Trusted Insight: What’s the number one lesson you’ve learned in your career as an institutional investor?

Jonathan Hook: The first thing that comes to mind is that the governance of the organization is number one and number one in huge font. The organization needs to set up a good governance model, needs to follow the model, and if it does the success of the investment team will follow from that. When the governance model is not set up right, or when it gets broken then one often sees performance suffer. If you have a good team you can work through a broken model, but it’s very difficult. Seeing the foundation and how it’s operated, every day I think “governance, governance, governance,” and how it makes our job easier and makes it easier to communicate with roles and responsibilities being very clearly defined. That’s been so clear and so gratifying for us. This is right at the very top.

You have to have good people, and there a tremendous number of good people in this business across all endowments, foundations and pensions. It was nice to focus on building a small team that could be very cohesive and create the culture that I felt could fit into the existing culture at the foundation. I knew David very well, and I knew how he reacted to different issues and managers and things like that. He was an easy choice to have come onboard. The other two took a little bit longer to find, and we spent a lot of time filling those slots. We’ve now got two other people that are terrific, and the four of us make a good team. Culturally, it’s been a good fit within the foundation as well.

Trusted Insight: I know you stated the mission of the foundation is to help the poor. You've said that both trustees and president let's you know you don't have to worry about what the foundation is doing, just make money in an honest way. Do you get to have gratification from raising money or helping raise money for such a noble cause. 

Jonathan Hook: Sure. I will give you two quick examples.

First, an absolutely mandatory issue I wanted for myself and the other investment team members was to sit in on the program committee meetings, which is where all our program officers meet with the board of trustees and they approve all the new grants. For us to fit in to the foundation, I really wanted us to know why grants were made or not made to particular organizations. That was very important to understand the real core of the foundation. That was met very positively and foundation has been very happy that we’re in there. It was also a great way to get to know everyone quickly so we could get on boarded and embedded into the foundation more quickly.

The second issue, and it just happened recently, is that once a year every employee gets to make a grant of $20,000 to an organization of their choosing. For those of us who don’t make grants on a daily basis, it’s something very special, and we get to focus on any of the areas on which the foundation focuses. We get to pick out an organization that follows with the mission of the foundation and conduct all of the due diligence that one should do for making a grant. Nearly half a million dollars in grants of the employees choosing is a powerful statement. We hold a nice luncheon hosting our grantee, where we introduce them and they can tell a little bit about their organization.

It’s a terrific event, and something that is not usual for most organizations. The best part is that each year we get to do it all over again.  $20,000 can be very meaningful to many organizations, and it’s another way we can give back to the community. Over the full year the foundation gives away about $100 million in aggregate. We see the benefits all the time of the various things that the foundation is doing. When you get to give your own grant personally it just adds a richness to the overall purpose. It’s a very nice combination of philanthropy and the investing efforts to help sustain that.

Trusted Insight: What else should I know about you, the foundation or foundation investing in general?

Jonathan Hook: The foundation has a nice position within the wide range of foundations around the country, and Harry Weinberg, the founder, felt very strongly about the role he wanted this foundation to play. It is more of a grassroots operation where we work with local organizations to help the poor, the needy, the developmentally challenged, the under educated and the under trained. Harry wanted the money that he left to the foundation, his legacy, to focus on organizations and needs like that, while other organizations might focus on different level issues. He wanted to distinguish this foundation from some others, and I believe that has been recognized within the philanthropic community. It’s very rewarding and a very nice environment in which to work.

To learn more about the investors powering the world's top foundations, check out Trusted Insight's list of The Top 30 Chief Investment Officers At Foundations.