Can Commonfund Compete?
Investment consultants are piling into the growing outsourced-CIO market. What does that mean for legacy pure players like Mark Anson’s Commonfund?
There’s no hiding from the fact that Commonfund — the Connecticut-based outsourced-CIO shop — has seen a drop in assets since the run-up to the financial crisis, ten long years ago.
But newly minted CEO Mark Anson likes David-versus-Goliath battles.
Giant consulting firms have pushed into the OCIO industry, Anson says, for obvious reasons: They can charge more in fees. And they were already advising clients on investing, making it a natural progression to begin managing their assets.
“They’ve been the camel’s nose under the tent for a long period of time,” says Anson in a phone interview. “What they’ve decided to do is bring the whole camel under the tent, both one- and two-humped camels.”
Commonfund was founded in 1971 to help nonprofits manage their assets with modern investment strategies. Today the firm is well known inside the niche world in which it sits, but is relatively small, with $25.3 billion of assets at the end of June — a 7 percent decline from mid-2007, even as its business taking full discretion over clients’ portfolios grows.
“The OCIO space is fiercely competitive nowadays,” says Anson, who also serves as Commonfund’s chief investment officer. “There are many new entrants. And certainly, the consultants are the ones who tend to dominate.”
The industry’s global assets, managed on a fully or partially discretionary basis, have soared in recent years, with Cerulli Associates predicting they’ll swell to $2 trillion by 2020, and as much as $2.7 trillion by 2022. That’s based on the expectation that they’ll keep rising at a double-digit rate annually.
Anson points to Mercer, Aon, Willis Towers Watson, and Cambridge Associates as heavy-hitting consulting firms that have scooped up OCIO assets over the past decade. He says client turnover coming through the crisis had generally prompted such firms to review their business models, then press into the more lucrative market of managing portfolios for institutional investors.
Commonfund did some of its own self-examination three years ago under former CEO Catherine Keating, according to Anson, who joined the asset manager as CIO in January 2016. (He was previously president and investment chief at the family office of Texas billionaire Robert Bass, filling other executive roles in asset management before that, including CIO of the California Public Employees’ Retirement System, the largest pension fund in the U.S.)
After taking a hard look at its business, Commonfund decided to pivot to focus on its strengths: total portfolio construction and private capital. The firm understood the repositioning would initially result in a loss of assets, Anson recalls, but was willing to take the steps needed to sharpen its competitive edge.
The firm’s multiasset business — its largest more than a decade ago — has shrunk to the smallest. The unit, which consists of commingled multiasset and stock and bond funds, saw assets drop 79 percent to $2.8 billion at the end of June, from $13.6 billion in mid-2007, according to Anson.
Explaining the decline, he says Commonfund closed about 40 percent of its funds after he and Keating considered the particularly high influx of new entrants in the multiasset market, which includes smart beta strategies.
“We were willing to do this because we know this space is very competitive now,” Anson says, adding that the firm has continued to offer its larger, core funds in the category. “We now have a much clearer business model.”
Meanwhile, assets in Commonfund’s total portfolio construction unit — what it now thinks of as its OCIO business — have more than tripled over the past 11 years, to $13.4 billion at the end of June. The firm takes full discretion over clients’ portfolios in this area, or partial discretion for a majority of their assets.
A large percentage of Commonfund’s multiasset clients have migrated to its OCIO business, Anson says, where they remain invested in the firm’s commingled funds that invest across stocks, bonds, and alternative assets.
Assets tied to the firm’s second self-proclaimed strength, private capital, fell 7 percent to $9.1 billion at the end of June, from $9.8 billion in mid-2007. Here the firm manages private capital assets for clients who might also work with other money managers for the same purpose — so it’s not necessarily an exclusive relationship.
Anson says Commonfund emphasizes performance over asset growth in private capital.
“It’s a bit of a tug-of-war,” he explains. “We want to ensure we continue to produce great double-digit returns across all of our programs.”
Commonfund creates private capital portfolios for investors seeking exposure to areas such as private equity, venture capital, real estate, and private credit, according to Anson. He says the team also invests in the secondaries market, buying stakes in funds managed by private equity and venture capital firms.
“Our job is not to be the biggest,” says Anson. “The catch is, the really great private equity and venture capital managers out there are capacity-constrained.”
In the VC market, Anson sees a large dispersal in performance between the managers in the first and second quartiles. “It’s a very small group of the most successful ones, and you want to be with the very best in venture capital,” he says.
Within private equity, Anson contends that Commonfund could increase assets by committing more capital to funds overseen by large, high-profile firms. “But then we have to trade off the return performance, and we’re not willing to do that,” he notes. “We don’t have the pressure to grow like a public company or like a consulting firm.”
Instead, the firm generally prefers small to midmarket private equity managers that are adept at adding operational value. The average fund size in Commonfund’s private capital program is $500 million to $550 million, Anson says, drawing a contrast with firms that have more room for investors because they’re continually raising pools as large as $20 billion.
At least for now, Anson is sticking to the vision set by Keating, who left Commonfund at the end of June to become CEO of Bank of New York Mellon Corp.’s wealth management unit.
“We have a game plan,” he says. “Now it’s just focusing on what we know we need to do.”
For instance, the firm is spending more time seeking business from larger clients that have $250 million to $1 billion of assets, he says, while continuing to work with smaller endowments and foundations that oversee less than $250 million.
Trinity College in Hartford, Connecticut, and Bucknell University in Lewisburg, Pennsylvania, are among Commonfund’s clients falling into the larger range. Trinity became a client this year, and Bucknell hired Commonfund about two years ago, according to Anson.
Other clients include the William Penn Foundation — which supports greater Philadelphia by investing in the arts, education, and watershed protection — as well as the Center for Natural Lands Management; Western Washington University; and Rust College, a Holly Springs, Mississippi, school founded in 1866 for newly freed slaves, according to Commundfund’s website.
Endowments and foundations are the firm’s “bread and butter,” says Anson. “We’re talking more to more pension plans, and I suspect that we’ll probably talk to more family offices as well.”
The influence of OCIO firms in the selection of asset managers has increased significantly: Ninety percent of fund managers polled by Cerulli last year had won a mandate through the industry, jumping from 33 percent in 2014.
A lack of internal resources, a desire to improve governance, and the need to increase risk-adjusted returns are the top reasons that investors have turned to OCIO providers for help, according to Michele Giuditta, a director in Cerulli’s institutional practice.
“The consultants have definitely had a lot of success,” she says, adding that they have consolidated to position themselves as leaders in the OCIO industry. For example, she notes, Towers Perrin merged with Watson Wyatt in 2010. Willis Group then purchased Towers Watson in 2016, creating Willis Towers Watson.
The Arlington, Virginia–based consulting firm announced in March that its OCIO assets had surpassed $100 billion on strong demand from retirement plans seeking to outsource all or part of their investment management responsibilities.
The biggest OCIO providers today are Mercer, Russell Investments Group, Aon Hewitt Investment Consulting, Willis Towers Watson, and BlackRock, according to Giuditta. Compared with advising on asset management, she says, fees are generally higher when “taking discretion” for the investing decisions.
“We’ve seen an immense amount of growth in our OCIO business,” says Sona Menon, an outsourced–chief investment officer and head of North American pensions at Cambridge. There are endowments and foundations among its clients, she says, but the firm sees the strongest demand from corporate pension plans.
Cambridge will manage a client’s entire pool of assets, overseeing portfolios as small as $100 million or as large as $4 billion, according to Menon. The firm will also step in to manage part of a portfolio where there’s a dearth of expertise or ideas, a service more typically used by even larger clients.
“Where we’ve seen most of the interest has been for alternative assets,” says Menon, including private equity, venture capital, hedge funds, private credit, and real estate.
Commonfund, meanwhile, is examining ways to innovate within the firm’s portfolios.
“That’s where I’m spending a lot of time,” says Anson. “When we’re going up against the consultants, we have to fight their scale with innovation.”
As such, the firm has invented its own quartile ranking system for hedge fund managers.
“What makes us special in that regard is that there is no quartile ranking system for hedge funds,” says Anson. Institutional investors generally judge managers by benchmarking their performance against Hedge Fund Research’s HFRI index, which tracks the industry’s returns.
“Our goal is to drive the HFRI index all the way down into the bottom quartile compared to our managers,” says Anson. “We’ve now done that.”
When Commonfund takes over a hedge fund portfolio from another external manager, it tends to find that allocations have been equally spread across four categories: equity hedge, event-driven, global macro, and relative value. The intention is to diversify, but such a standardized approach can lead to “a lot of crowded trades,” Anson says.
“We can bring in any hedge fund manager regardless of their strategy, and we know how they fit in our portfolio,” he explains. “We’re quartile-ranking our managers against each other in our funds, so it’s hand-to-hand combat.”
Man Group’s GLG is a hedge fund manager that Commonfund likes. Anson, who declined to name others in the portfolio, says the firm invested in GLG’s global macro currency offering that was opened up to a very limited number of investors about two years ago.
Commonfund has been working to drive down the firm’s hedge fund costs, aiming for zero charge for management fees and 30 percent for performance. That’s a twist on the traditional 2-and-20 model. Anson says Commonfund is in a stronger negotiating position to achieve that goal because, under its restructuring, the firm reduced the number of hedge fund managers in its portfolio.
Consulting firms have an advantage when it comes to lowering costs for their OCIO clients owing to their “great scale,” says Anson. “They can drive costs down to the bone,” he explains. “We have to be smarter, we have to be faster, we have to be more flexible. And we have to be able to find ways to find fee breaks.”
Last year foundations had average investment returns of about 15 percent net of fees, producing the biggest gains since 2013, according to an annual survey by the Council on Foundations and the Commonfund Institute. The study was based on responses from 224 foundations overseeing about $104 billion at the end of last year.
Anson declined to disclose Commonfund’s performance for clients, as the information is private.
Although Commonfund trails many of its rivals in the accumulation of assets, the CEO points to a Cogent report in May as evidence that the firm remains tops in the eyes of many institutional investors.
The report shows that Commonfund ranks No. 2 among nonprofits that were asked which OCIO provider they would most likely recommend their institutions consider over the next year. BlackRock, the world’s largest asset manager, with $6.3 trillion of total assets, won out.
Happy to share those findings over email, Anson would not utter on the phone the name of the firm that beat Commonfund.
“You can see in the report who is ranked No. 1,” he says. “They are a giant compared to our David.”