Oklahoma State University Foundation's Evolution To An In-House Investment Office | Ryan Tidwell, Chief Investment Officer | Q&A
Ryan Tidwell is the chief investment officer at the Oklahoma State University Foundation (OSUF). He leads and empowers a team of eight within the OSU Foundation Investment Office, which is responsible for the day-to-day management of almost $1 billion for the benefit of Oklahoma State University and other affiliated nonprofits.
In this interview, he discusses the transition from a consultant-driven process to a fully resourced in-house investment office, how they achieved a top quartile track record over the last 3-5 years, and why other small institutions should focus on building out their investment office.
Ryan Tidwell was named on Trusted Insight's 2019 Top 30 Foundations Investing In Diversity.
Trusted Insight: Tell us about your early days at the office with no staff. How has OSU implemented an institutional process with a team that performs all sourcing and due diligence in-house?
Ryan Tidwell: The story starts in the early 2000s. We were a bit late to the development game, so our endowment was smaller than many similarly-sized state universities. We were utilizing a local broker to do a lot of our investing, with oversight from our Investment Committee. When our current President joined in 2003, he said, "We've got to institutionalize this, we've got to hire an institutional investment consultant" – which we did. At the same time, our Investment Committee read David Swensen’s Pioneering Portfolio Management, and bought into the idea of the “endowment model” portfolio. We began investing heavily into alternative investments, which served us really well from '03-'07. Over that period, we were actually one of the top-performing endowments.
"While it has certainly been an evolution, during my eight years here, I’m proud to say that we’ve successfully transitioned from a consultant-driven process to a fully resourced in-house investment office."
However, one of the primary reasons for that is we were carrying a lot of equity risk. Once the crisis hit, it exposed some of the weaknesses in our governance structure, and certainly in our portfolio. To our Committee and Board's credit, they did not overreact. Instead, they recognized that we had a problem that needed to be fixed. For them, the biggest challenge was that they did not fully understand what we owned, which meant they didn’t know which levers to pull. The consulting relationship did not give them a sense of ownership, and the consultant did not take that ownership either. They spent the next few years evaluating various governance structures, and did a lot of diligence on the different models that were out there. They interviewed OCIOs and interviewed other consultants, and ultimately decided to build out an internal investment team. I ended up joining them in March of 2011, with a five-year plan to transition us from a consultant-driven model, to an in-house investment office.
Surprisingly, we were able to accomplish the majority of our plan over the next nine months. As a result, we officially removed our consultant at the end of 2011 and the internal investment office – who at the time was just me – started to really drive the process. However, I'm a young guy, and I didn't have a whole lot of gray hair – at least not yet. I recognized the value of having someone experienced I could bounce ideas off of, who would give me honest advice and wise council. As a result, we did engage a consulting firm, but it wasn't your typical engagement. I worked with a very specific individual who I had reached out to and said, “We want to work with you, and here's the way we'd like to work with you.” This individual said sure, it was exciting for him.
He has recently moved on from the consulting firm, to become the CIO of a pretty large health care plan. He worked with us for about six years, and his departure actually worked out well, as our internal resources had grown to the point where we didn’t feel it was necessary to work with a traditional consultant anymore. We are now a little over a year removed from that decision, and it has worked out well so far. While it has certainly been an evolution, during my eight years here, I’m proud to say that we’ve successfully transitioned from a consultant-driven process to a fully resourced in-house investment office.
Trusted Insight: OSU has a top quartile track record relative to its peer group while maintaining a risk-controlled portfolio. What separates OSU from its peers of similar size?
Ryan Tidwell: When I got to OSUF, we had 12 Investment Committee members, and I met with all of them individually during the first quarter of being here. What I learned is that we had 12 different visions for what our investment function needed to be and what our portfolio needed to look like. I always say that companies do not suffer from a lack of vision, they suffer from too many. That certainly was the case at OSUF. I worked to unite us around a single vision of what we wanted to accomplish, both with our investment function and within our portfolio. To be able to do that was critical, because you get everybody rowing in the same direction. That vision then informs what resources you are going to dedicate to this function. It took us away from making decisions about budget dollars specifically, to asking "Is this going to help us achieve our vision?" If so, then we need to go forward and do that. That made a big difference for us.
"We've been able to achieve a top quartile track record relative to our direct peer group, and even relative to the larger peer group, over the past three and five years."
We stopped focusing as much on all the minutiae people spend a lot of time on, and really started to look at "Okay, what makes sense for achieving our vision, and how do we then build our portfolio in that way?" That is really what we've done. We've stripped out all the traditional asset classes and really look at investments as either being capital appreciation or capital preservation. Our goal is to meet a return hurdle of 5.75% real, without having to take excess risk to get there.
Following 2008, our Board is quite sensitive to downside risk, so we do not want to be taking any more risk than we have to, and we have constructed the portfolio that way. The other thing we do quite a bit differently is that we use valuations as a guide. This means that we are not beholden to our strategic asset allocation. We have pretty wide ranges that have been built into our allocations, and we are willing to shift our equity exposure based on what valuations are telling us about where we are in the cycle. We have been arguably under-allocated to equity for the past few years; we have been running with an average equity allocation of about 49%, to give you some perspective. We've been able to achieve a top quartile track record relative to our direct peer group, and even relative to the larger peer group, over the past three and five years.
Trusted Insight: Tell us more about the private investment program at OSU. What are the next steps?
Ryan Tidwell: When I joined, we had 14 GP relationships, most of which were in the bottom quartile. We've let those relationships roll off and distribute capital back to us. Although we did explore it, we did not sell anything on the secondary market, because the bids we received were not worth it. We re-underwrote those investments and determined we were going to get more out of them by holding onto them – which has fortunately played out for us. Given our lack of legacy relationships, we made a concerted effort to ramp up private equity investments, especially recently. It's the one area where we've significantly expanded our number of GP relationships.
"We recognize the benefits of diverse experiences and mindsets, and we really want to be able to promote that as much as possible."
We are never going to have 100 line items, but we will have about 25 core relationships on the private side, all of which are somewhat of a meaningful allocation for us. We are going to have somewhere between 20% to 30% on the private side at all times. We're at about 20% right now. We were sitting at about 9% when I got here, so it has been moving up. We've built the program largely from the ground up, and it has been delivering pretty solid returns, annualizing at over 20%.
Trusted Insight: Diversity is very important at OSU, both internally and externally. How is the Foundation tackling this initiative considering you’re just beginning to scratch the surface?
Ryan Tidwell: We believe diversity is very important, and there is probably not enough focus on it. I want to be clear – we're not going to push the initiative just to push the initiative. However, all other things being equal, we would prefer to have and promote diversity; that's something that we do spend time talking about. We have invested with a number of different firms that are women and/or minority-owned. It's not that we're specifically going and targeting those groups, but when we are able to identify compelling GPs that have those characteristics, it's great. We recognize the benefits of diverse experiences and mindsets, and we really want to be able to promote that as much as possible.
A lot of that goes back to OSU's mission as a University. We are a land grant institution, which is trying to provide an education for all those who want one. As a result, it's a very diversity-focused school. For us in Oklahoma, a lot of that is related to the Native American tribes. We want to provide them an opportunity to get a world-class education at Oklahoma State University. In our portfolio, we think about it the same way. We're going to focus on diversity where we can, but we're not going to do it to the detriment of trying to achieve returns. It's something that, from an initiative standpoint, we're starting. Before, we did not necessarily monitor it or try and focus on it, but we're now monitoring it actively and are more aware of managers that are in those categories, as well as on the social responsibility side. We do monitor those that are doing anything socially responsible and ensuring that, at least where they can, they're trying to promote it.
Trusted Insight: What can endowments or foundations do to help lift the barriers to women and minorities?
Ryan Tidwell: I think like anything else, we shouldn’t put up barriers that don’t need to be there, and we certainly do not. Over the last few years, we've recruited for several roles on both the investment and operations sides. Throughout those processes, we have had a number of qualified people apply that are both women and minorities. From our standpoint, those are not only compelling candidates, but it's exciting to see that, as I honestly didn't expect to see that type of response.
Ultimately, we are going to encourage hiring the absolute best candidate, regardless of gender or race, but it's one of those things that we'd love to see more of across the industry. And, we continue to try and foster that environment in our office. We encourage the development of all our employees, to the best of our ability, and there is absolutely no ceiling on anyone in our office.
Trusted Insight: What attracted you to investing on behalf of a foundation versus other institution types?
Ryan Tidwell: I absolutely love the mission here. We are helping students get a world-class education, despite a seeming stigma outside our state of "What good comes from Oklahoma?" I heard that even before I got here, and we've seen it in recruiting. It’s astonishing how many people still view Oklahoma as the “dust bowl,” and it just is not. There is a tremendous opportunity here for students, and even within what we're trying to do from an investment standpoint.
I want to build something that is truly leading – our vision is to be a benchmark for institutional investing in the middle part of the U.S. – and we are going to build that out of Oklahoma City. I'm convinced of that, and that's really what's driving me. I have had opportunities to go to bigger cities and to make significantly more than I'm making here, but that is not what I want to do. I really want it to be about achieving greatness for this University and for this program, and that's what our office really is about. Everybody in our office has really bought into that mission, and most of them have had opportunities to go elsewhere and do other things, but they're convinced that we can build it here.
Trusted Insight: Is there anything you’d like to add?
Ryan Tidwell: I would comment that we've come a long way, but there is more that we are capable of doing. There are so many people that are in decision making roles at foundations or universities that automatically believe that they’re sub-scale and incapable of doing this – but I think we've proven that it's possible. You can do it. It's not easy, and I think our Board will admit it has not been an easy process, but it can be done.
Reflecting on just how far we've come – although we've still got a long way to go, there are a lot more, especially of our size, that should be considering either the buildout of an office, or maybe even partnering with other institutions. The other piece that I'm frustrated about and do not see enough of is partnerships. In our industry, it's a lot of competition. There are a lot of us working towards similar missions, and we should be looking for more ways to partner with each other.
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