Expanding Portfolio

In the wake of one of the most troubled years on record for university endowments, TIAA-CREF officially declared Tuesday that the firm will get into the endowment investment management business.

TIAA-CREF oversees more than $400 billion in pensions of more than 3.6 million clients in academic, medical and cultural fields. Banking on its reputation within academe, officials said the company is responding to institutional clients who want to fully outsource management of their investments.

May 18, 2010
 

In the wake of one of the most troubled years on record for university endowments, TIAA-CREF officially declared Tuesday that the firm will get into the endowment investment management business.

TIAA-CREF oversees more than $400 billion in pensions of more than 3.6 million clients in academic, medical and cultural fields. Banking on its reputation within academe, officials said the company is responding to institutional clients who want to fully outsource management of their investments.

The New York-based company's announcement came on the heels of a Bloomberg article that forecast the plan, citing anonymous sources. TIAA-CREF confirmed the news Tuesday, adding that Rice University’s longtime endowment chief, Scott W. Wise, would head the operation from Houston.

Wise may be one of several current college investment gurus swooped up by TIAA-CREF. With the help of Russell Reynolds Associates executive search firm, the company expects to hire something on the order of 20 or more people with endowment investment experience. But Ed Van Dolsen, executive vice president of product development and management, said TIAA-CREF aims to avoid alienating its existing clients by raiding their in-house talent.

“We’re not looking to poach from a team that would cause any of our clients a real issue,” he said. “We certainly are mindful of not stressing out our clients by pulling too many managers from them.”

In the endowment investment world, talent doesn’t come cheap. Wise is one of Rice’s highest paid university officers, drawing more than $865,000 in salary and benefits in 2008, according to tax forms. TIAA-CREF would not discuss the terms of Wise’s deal Monday, but the company’s top brass made between $2.1 million and $8.2 million in 2008, the company has disclosed.

Wise has been with Rice since 1989, but his departure comes less than two years after he was tapped to lead an internal company devoted to managing the university’s investments. Rice President David Leebron thanked Wise in a prepared statement Monday.

"Scott's contributions to Rice date back to his days as a student and star baseball player and continued through his 31 years of service to the university. His steady hand on our investments has served us well in good times and bad, and we will miss his leadership,” the statement read.

The university, however, “can’t make projections” about whether it would now turn to TIAA-CREF to handle investments, said B.J. Almond, a spokesman for Rice.

Investors May Gain Access to Complex Funds

As endowment investment strategies become ever more complex, a number of colleges have acknowledged that they lack the internal expertise to manage their portfolios. TIAA-CREF is responding to that reality, but it’s not the first firm to do so and won’t likely be the last. Goldman Sachs Group, Inc., for instance, is looking to expand into the market, Bloomberg reported.

Commonfund, which was founded in 1971, already manages more than $25 billion for nearly 1,600 institutions. Some colleges completely outsource their investments to the firm, while others hire Commonfund to manage just a portion of their portfolios.

This month Commonfund rolled out a new program called the Custom Investment Office, which is specifically aimed at large universities and other nonprofits with $750 million or more in assets. Many of those universities have been more likely to handle investments themselves, while colleges with smaller endowments have tended to seek out Commonfund.

The firm made some news in 2008 when Wachovia, Commonfund’s trustee bank, froze assets in a short-term fund that some colleges relied on for operational expenses. The investors have since been paid back, and Commonfund didn’t see colleges leave on any significant scale, said Verne Sedlacek, president and chief executive officer of Commonfund.

“We’re proud of how it came out; we’re certainly not happy with what happened,” Sedlacek said.

As for TIAA -CREF's emergence in the investment management space, Sedlacek said he welcomed competition.

For a number of reasons, colleges with smaller endowments often lack access to the investment funds that the wealthiest universities tap into. Some funds are simply off limits to smaller players, either because they don’t have sufficient assets or because they don’t have relationships with the right managers. By outsourcing investment operations, even small colleges can play in the bigger leagues, the theory goes.

“We will be able to get institutions access to managers they wouldn’t be able to get to on their own, we firmly believe,” Van Dolsen said of TIAA-CREF.

In some ways, however, that’s the rub. Critics charge that too many colleges have tried to mimic the strategies of heavily endowed Ivy League institutions without the proper expertise to research the risks of complex investment products. While TIAA-CREF and Commonfund will argue they provide such expertise, it’s still crucial that a college’s own people understand the investments they are making, said John Nelson, managing director of Moody's Public Finance Group.

“Is there a magic bullet where these smaller endowments can just outsource everything to one firm and not pay that much attention? I would say the answer is no,” Nelson said. “You have to do your due diligence regardless. There’s nothing that says just because you’re with a firm that’s been around a long time, that that removes your obligation to do your due diligence.”

The very fact that colleges are looking for outside help shows what a significant priority endowment investment management has become. That’s a troubling “shifting of focus,” according to Leon Botstein, president of Bard College.

“It’s great to have money, but there are unexpected dangers in it,” he said. “It turns the emphasis on investment management, not the performance of an institution on research and teaching.”

Bard’s $200 million endowment supports only about 2 percent of operations, and Botstein says that’s as it should be. He would be much more inclined to spend donated funds to build new programs and improve existing ones than to sock money away. Given the problems higher education now has educating and graduating students, it’s clear colleges need the money now -- not tomorrow, he said.

“We’re doing a bad job, so why are we preserving what we’re doing for the future?” he said. “A war chest to preserve what? Mediocrity?”

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