Dysfunction Cost Cornell $700 Million. Can a New Investment Crew Turn It Around?
The perennial Ivy League laggard is sick of losing.
Don Opatrny hit rock bottom early in his service to Cornell University’s endowment.
“The worst day was going into an investment committee meeting where two people were yelling at one another over whether or not we should be hedging our equity exposure — because of the prior day’s market activity,” recalls Opatrny, a Cornell alum who made a fortune in Goldman Sachs’ 1999 IPO as a partner and then quit banking. Opatrny joined Cornell’s meddlesome oversight panel in 2005, rising to lead and reform it, and handed off the chairmanship this June.
During his tenure, Cornell churned through six chief investment officers. Its now–$7.2 billion portfolio delivered worse returns than the average U.S. university or foundation. On the Ivy League endowment train, Cornell would be the caboose if not for legendary washout Harvard. Years of dysfunction have cost Cornell dearly — nearly $700 million, in fact. That’s how much the institution has lost over the past ten years by returning 4.8 percent annualized, versus the average $1 billion-plus U.S. endowment’s 6 percent return.
But the Ithaca, New York, university known for “eating CIOs alive” has mounted an unlikely turnaround — one that few expected and almost no one’s noticed. Here, for the first time, is the story of how they are doing it.
Eighteen floors above midtown Manhattan, the flat-screen TV streams Cornell’s bird cam. Throughout the spiffy new investment office, visual reminders nudge the young team to remember what they’re working for. Ithaca’s leafy, lakefront campus surrounds the analyst pen in a series of framed photos. Fresh coats of Benjamin Moore carnelian red — the precise shade of the university logo — cover the walls. Running across walls and partitions are quotes picked by chief investment officer Kenneth Miranda from school founder Ezra Cornell and other leaders. “A place where the most highly prized instruction may be afforded to all,” the lobby glass declares in frosted type. Miranda frets briefly over the quote in reception — its glossy letters don’t stand out from the matte carnelian background quite enough.
“I love design,” says Miranda, who took over in July 2016 after serving on the investment committee. “For me that was a creative outlet in a pressure period. I’m not certain anyone reads the quotes, but I want the staff to understand the purpose to what we’re doing and remember that this isn’t just a job.”
Succeeding for Cornell meant leaving Ithaca, leaders came to believe. Miranda marks that split. He was approached for the CIO role several years earlier while leading the International Monetary Fund’s investments, but pulled out of the search on family grounds. Moving to upstate New York from Washington, D.C., wasn’t going to fly at that moment. But Opatrny wanted Miranda involved, if not as CIO right away, then as a committee member — “even though Ken was not a Cornellian and was not a trustee,” Opatrny notes. Recruiting for this investment post had produced frustratingly shallow talent pools, according to the former chair.
“There was a formal CIO search, which ultimately ended in promoting A.J. Edwards,” a senior staffer who’d taken over interim duties when CIO Michael Abbott flamed out after just a few months. Opatrny admits, “We were not able to find the talent that we were really looking for, in part because of the history [of turnover] and in part because of the location. So we elevated A.J., and he did a very solid job of managing and running it day to day.”
Opatrny continues: “But as it happened over several years, we wanted to achieve something greater than we thought we were on a path to achieve with A.J. We were facing several issues, including whether the investment activities should continue to take place in Ithaca.” (Edwards eventually went to work for a local venture capital firm. He did not respond to messages sent via the fund’s administrator.)
Two long-term plays, set in motion when Cornell settled for Edwards, also bore fruit around 2015. Miranda’s nest in D.C. was closer to emptying, making him open to the CIO role. Moving Cornell’s investment office to New York City likewise seemed within reach. “There are lots of politics to the relocation,” says Opatrny. “There were people that worried, ‘Is it a comment on Ithaca relative to New York?’” On their merits as financial hubs, that’s precisely what it was.
Some university investment offices excel on bucolic campuses, explains the former chair, pointing to Notre Dame’s famed investment office in South Bend, Indiana. “But I think now anyone would acknowledge that it was a good decision. A number of years ago, for example, we were looking to hire a senior investment officer and had something like three or four very high-potential applicants.” Cornell recently did a similar search in New York City, resulting in 300 or so — “a staggering difference,” notes Opatrny.
Miranda needed that deeper talent pool. Nearly all of the staff has turned over since he arrived. Just four people on the 23-person team predate him — although no one was fired, he stresses. Many people, including the entire operations team, opted to stay in Ithaca when their jobs moved south.
“There’s been a lot of change management,” Miranda concedes. “Think about moving from Ithaca to New York, hiring all the investment analysts, revamping your ops team. You could have a disaster on your hands very easily.” He’s wary of jinxing himself, but says, “There’s never been a disaster.” He’s told one or two overstressed staff members to take a few days off, because “you’re taking it a bit too seriously and you need to chill for a couple of days.”
Those who’ve joined Cornell went in with their eyes open to its troubles. “Ken was candid with me about the problems he wanted to solve,” says quant Andrew Miller, a former data scientist lured by the challenge. During his job interview with the CIO, “our conversation tended to wander. He gave me fatherly advice.”
Miller signed on last May, and set about overhauling Cornell’s primitive risk, analytics, and liquidity operations. His colleague Sean Graham jumps in: “The systems weren’t so much systems as a series of spreadsheets.” Graham left General Motors’ pensions team last spring to lead operations for Cornell, where he met — and swiftly killed — “Cedric.” That was the homebrewed ops system, which reminded Graham of “Doctor Frankenstein’s monster.”
Overhauling operations may be complex and annoying, but it’s already paying off after a year or two of meticulous work. On the other hand, fixing a portfolio stuffed with poor choices will take five or six. And getting a leader and a team in place who can do that took Cornell more than a decade.
“Yes, they ate me alive,” says one former senior investment staffer. This person joined knowing Cornell’s governance resembled a Soviet bureaucracy more than an elite endowment’s, but believed it could evolve. “I was so naïve.”
A raft of prominent alums and trustees controlled even workaday decisions, like shifting small amounts of capital from one outside fund to another. One trustee insisted on attending manager meetings. Most were finance professionals and aware of best practices, but they chose not to use them. Other top universities opened their investment offices to Cornell’s nomenklatura, explaining the governance infrastructure behind their superior returns. “Obviously, it was very informative,” says Paul Gould, who was investment chair at the time of the visits. “We had an office in the early 2000s where the staff made no manager selection decisions.”
According to Yale University CIO David Swensen — the undisputed GOAT (greatest of all time) — investment committees should act like a board of directors, providing oversight and keeping out of the day-to-day. As Swensen wrote in his canonical book Pioneering Portfolio Management, “Aggregating a collection of investment specialists occasionally poses dangers, particularly when committee members attempt to manage the portfolio, not the process.”
Yale’s former longtime investment chair likened his role to “sitting in the front row of the bleacher seats at the 50-yard line, watching wonderful results unfold.” In Ithaca, committee members called the plays.
As the ex-employee sees it, “The trustees and alums were just having too much fun — meeting investment managers, getting the latest VC pitches. For any new mandate we’d bring three finalists in for a presentation, and almost always the decision was ‘Let’s hire all three. Or at least two.’” Where Cornell should have had one investment manager for, say, large-cap U.S. stocks, it would have six, according to the former staffer. “One trustee had one friend at one firm, and another trustee had another friend at another firm. Every bet gets neutralized; every decision gets diluted. And you wind up with mediocrity across the portfolio. There are folks you feel you really can’t fire because they’re a friend of trustees,’” the ex-employee says, adding, “You’re awakening nightmares for me.”
Gould believes the balance of power between committee members and staff was right at the time, and that Cornell correctly didn’t push earlier to change the model. He says, “I think the evolution went as fast as the talent merited.”
Cornell’s overseers have always taken their fiduciary duty seriously, as current and former insiders point out. Micromanaging staff is a common ailment, as Swensen has warned, but so is cowardice. After hiring problematic executives, other major endowment boards have let situations fester, as at Stanford and the University of California.
Facing this in 2011, Cornell’s overseers acted.
Two CIOs ago, Michael Abbott lasted just a few months in the top job before officials ousted him for abusing his expense account, according to three sources. Tough and pugnacious, the former “Goldman Sachs guy” quickly appeared to become frustrated with Cornell and allegedly lashed out via credit card. Abbott is a former police officer and is now chairman of a major cannabis company, Columbia Care, which was valued at $1.35 billion last year and trades on Canadian stock exchanges.
“Cornell is a tremendous institution that I am proud to have worked for,” Abbott said in a statement to Institutional Investor. “I stepped down from my position, and while I disagree with this characterization of my departure, I am subject to contractual agreements that preclude me from commenting further.”
Cornell effectively fired Abbott, saying publicly that “his style of conducting business is inconsistent with Cornell’s policies and expectations.” Officials owned up to making a bad hire rather than hiding it, and if that decision gave anyone pause, they quashed that doubt to do right by the institution.
Investment chair Gould cleaned house on his committee around the same time, removing some “strong personalities” and dialing back the meddling. “Probably about ten years ago, the committee turned around,” says Opatrny, who succeeded Gould as chair. “Never waste a good crisis.” Cornell’s fund lost 26 percent in one year during the financial collapse, and spent five years clawing its way back to even. “I think 2008 created an opportunity where people were open to doing things in a different way,” Opatrny notes. “I’m not a yeller and a screamer,” unlike, perhaps, other former members. Committee meetings evolved to feature “a lot less discussion on what the S&P was doing yesterday and much greater sophistication, greater focus on risks in the portfolio and whether we were being compensated adequately for those risks,” he explains. “As they say, the calm captain keeps a calm ship.”
In June of this year, Opatrny handed the chairmanship to Girish Reddy, an industry veteran who co-founded Prisma Capital, now part of KKR’s hedge fund juggernaut Paamco Prisma. A gentle and diplomatic speaker, Reddy monitors himself and fellow members to avoid creeping into Miranda’s domain. “The team should be driving the manager selection,” Reddy asserts. Much of that work so far has been removal rather than addition, as making it rain is no longer Cornell’s abiding investment philosophy.
“When I came, we had, I think, 400-plus accounts” or investment vehicles, Miranda says. “We still have an awful lot. We had 190 different managers. And we’re slowly squeezing it down. Our goal is 120 accounts and 70 managers. As we do that, we’re concentrating with higher-conviction managers and getting certain types of fee breaks because we’re consolidating assets.” U.S. equities, among other assets, needed full Marie Kondo–ing, the CIO found during a methodical portfolio review. “They all had the same sort of strategy, so when one underperformed, they all underperformed.”
Cornell’s cash management strategy, staffers say, was roughly: Have a lot and hope for the best. “We didn’t have a way to do a short-term cash flow forecast for 30 days or 60 days,” according to Miranda. “And as a result, people kept far too much cash.” When Andrew Park graduated from the office’s new rotational analyst program to full-time, he remembers Miranda stopping by his desk with a paper. “Dean Takahashi’s model for keeping cash flow drag to a minimum. It was one of the first I read.”
How can a $7 billion private university fund not know its cash flow? Why 400 accounts? If Miranda privately dwells on such questions — how did we get here? — he demurs in conversation. “I’ll just make this analogy,” the professorial CIO offers. “A lamp falls off the table and breaks. You can start asking who to blame — ‘Who did that?’ — and I never do. I’m like, okay: A) safety, B) let’s fix it, and C) let’s just move on. That’s all there is. It doesn’t pay to try to look backwards. Just look forwards.”
Asking a turnaround chief, “What’s taking so long?” belongs with “How’s your Ph.D. thesis going?” and “When’s your baby due?” as inadvisable questions. But anyone in Miranda’s seat will answer anyway: Illiquid assets take so long. Reddy starts his turnaround take there. “It’s not like you can turn a battleship on a dime. Ken hit the ground running, and we really chopped through a lot of wood in getting rid of managers that weren’t that great. It takes two or three years.”
Yet rehabbing Cornell has taken a decade to work. If a major donor or Cornell’s president had reassessed in early 2016, seven or so years into the process, he or she would have seen a placeholder CIO, a tight race with Harvard for dead last in the Ivy peer group, and the same $5.5 billion or so that the endowment had in 2008.
Three years later the investment division is unrecognizable. Miranda has lapped four of the past five CIOs in tenure, and next summer he will become the longest-running chief of Cornell’s modern endowment. While moving from Ithaca to Manhattan and changing out the majority of its employees, the team outperformed most of its peers last year, returning 10.6 percent versus the 9.75 percent average. Before anyone mentions battleships, yes: Endowment investing is a long game, and one year is one data point.
By the time returns prove whether the turnaround is real or just a good story with flukey data, it’ll be too late to change course. Students either will or won’t leave Ithaca debt-free; Cornell cancer researchers will or won’t get funding for a breakthrough study; administrators will choose layoffs, debt, or neither in the next downturn. Investments sent $3.3 million to the ornithology department last year. No money, no bird cam.
For all of Miranda’s earnest efforts to connect young staffers to the scholarly mission, the expectations are in basis points and Ivy League peer rankings. Cornell’s committee no longer takes payments in pounds of flesh. “Returns are part of what the team needs to generate,” Reddy says. “Like it or not, we live in that world. The alums care about how we’re doing relative to other Ivies. There is also a little competition and pride at stake” — or, as one senior analyst puts it, “swagger.”