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Mellon Foundation CIO John Hull: Optimistic After A ‘Surprising 2016’ | Exclusive Q&A

by trusted insight posted 4years ago 2089 views

John Hull is the chief investment officer of Andrew W. Mellon Foundation. He oversees all financial and investment matters for the foundation. Prior to joining the foundation in 2002, Hull served as the chief investment officer for the New York State Common Retirement Fund and as the director for the general cash and debt management activities. He is a trustee for Bryn Mawr College and a guest member of the investment committee for St. Bonaventure University. Hull is a graduate of the University of Texas and received an MBA from the University of Massachusetts. 

In this interview, he discusses his outlook for the future of capital markets following unexpected economic and political events in 2016 and his takes on a few hot current issues in institutional investing. Hull was recently named on Trusted Insight’s Top 30 Foundation Chief Investment Officers. He graciously spoke with us on April 19, 2017.  

Trusted Insight: It has been more than a year since we last spoke. Can you share with us a recap of the Mellon Foundation’s 2016? Was there anything memorable about capital markets in the past year? 

John Hull: We have not done anything materially different in 2016 than in prior years. We have tried to maintain a disciplined approach.  

As for the capital market, there were a lot of surprises. Clearly, the year started out rocky and then we had two big surprises with the Brexit vote and then the presidential election. Like most people, we thought the post-Trump world would not be as attractive financially as it has been. I have been very surprised by the market reaction to both of these events, particularly to the election of President Trump. 

Trusted Insight: Speaking of the U.S. election and other economic and political factors affecting the capital market, what's your general outlook for the future? 

John Hull: I try to think long-term, and I'm also an optimist. It's hard to be in this business and not be an optimist with a focus on the long-term. In the short term, there are a lot of issues regarding political unrest, both domestically and abroad, and trying to figure out how that plays out over the next six months or two years is very difficult.

Trusted Insight: In your last interview, you mentioned that during the 14 years at the Mellon Foundation, the portfolio has shifted to a higher allocation outside U.S., particularly in emerging markets. What areas within emerging markets interest you at the moment?

John Hull: We have shifted our strategy over the last several years from global emerging market managers -- say a manager based in London or Boston that invest in emerging markets -- to a strategy where we pay more attention to finding either regional managers or country-specific managers. Rather than relying on firms that are thousands of miles away, we have decided that a better approach is to find firms that are based locally, staffed by nationals from that country and are good at selecting stocks in smaller companies. I think it is more difficult to invest in smaller companies in China out of Boston rather than doing the same thing out of Beijing.

Over the past three years, we've added local managers in China and India, and we are continuing to look for investment opportunities in South America.

Trusted Insight: So, when you look for new managers located in foreign countries and unfamiliar markets, what criteria do you rely on when making commitments? 

John Hull: We do the same due diligence on those managers as we do on U.S.-based managers. We judge the quality of the organization and the track record they have exhibited. We try to make the best judgment of their integrity, process and quality of the people when we get a chance to meet in their offices.  

Obviously, we check references with other investors who have worked with the manager in the past. Sometimes we will visit companies with a prospective manager to better understand the manager’s due diligence process. It is more difficult because the manager is far away from home, but fundamentally it is the same process.

Trusted Insight: Do they tend to be big, established asset management firms or niche-y, specialized ones? 

John Hull: It's a mixture. For example, we have two managers in China. One is a large asset management firm with public and private strategies and the other is a smaller organization, but both have impressive track records.

Trusted Insight: One of this year's biggest news stories was Ford Foundation plowing $1 billion in impact investing. What’s your view on that? Do you think impact investing is a fad or a longer trend that's going to change how foundation investors allocate their money?

John Hull: It is not something that we have actively considered at the Mellon Foundation, but I do not think it is a fad. I think for certain institutions impact investing might be a real fit. It depends on the types of causes a foundation supports. For example, for a foundation that supports economic development in cities or rural communities, certain areas within impact investing that align with the foundation’s mission is probably something worth exploring.

It seems to me that the Ford Foundation has taken a reasonable approach, but it is a slow-moving process. A $1 billion commitment sounds like a big number, but they are not rushing into this in the next two years. Rather, they are going to do this at a reasonable pace and evaluating whether it is successful in meeting their objectives.

Trusted Insight: A quarter of your portfolio is invested in what's called diversified strategies, which includes multi-strategy and credit hedge funds. Is hedge funds performance or high management fees something that concerns you? 

John Hull: Performance has been difficult for some in the hedge fund community. We are more concerned about the net performance and less concerned about fees as long as the absolute net-returns are attractive for us. I would say in 2016, it was a mixture: we had some hedge fund managers that did very well, and some that struggled. We have not added much exposure to the diversified strategies portfolio in the last couple years, but we are actively considering new relationships and we continue to closely monitor the managers currently in the portfolio.

Trusted Insight: With all the criticism around hedge funds fees, do you think this structure is set to change soon?

John Hull: I think for the best managers, the chances of the fee structure changing are probably pretty slim. 

At the end of the day, people are going to ask, “what is my net return?” If we are paying 2 and 20 and receiving an attractive net return, we should be fine. If we are paying 2 and 20 and not receiving an attractive return, we are going to be more concerned with the performance than the fee. So, I think firms that have to adjust the fee structure because of poor returns are probably going to lose clients anyhow.

Trusted Insight: Are there any new investment products or innovation within finance in general that you find interesting? 

John Hull: There is nothing that is changing our focus of maintaining a fairly disciplined process. We are not necessarily a trend follower. That discipline has worked well for us, and my guess is that will continue to be our strategy.

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.