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Money Masters, Part 2: The All-Stars

The stand-out winners in our third annual Institutional Investor Investment Management Awards.

The All Stars:
Our lineup of leading investors

Large corporate pension plan
Douglas Brown, CIO, Exelon Corp.

Liability-driven investment is becoming money management gospel, at least where Douglas Brown travels. When Exelon Corp. tapped Brown in late 2009 to take over its defined benefit plan, which now has $11 billion in assets, the Chicago-based utility was looking for the same sort of liability-hedging talents he had displayed at the former Chrysler Corp. “It was a unique opportunity to come into a sizable platform and take a clean-sheet approach,” says Brown, who had spent his entire 26-year career at the automaker, eventually becoming chief investment officer in 2003. Four years later, as Chrysler’s ownership shifted from Germany’s DaimlerChrysler to private equity firm Cerberus Capital Management, Brown began implementing the so-called LDI approach, becoming more defensive and hedging the company’s exposure to interest rates.

After the ravages of 2008, that’s exactly what Exelon’s traditional structure needed, with 65 percent allocated to equities, 30 percent to fixed income, 5 percent to real estate, no interest rate hedge on its liabilities and little exposure to alternative investments, including hedge funds. Brown, the master trust’s first CIO, started with a 20 percent hedge on Exelon’s interest rate risk and liabilities, then decreased long-only equity and increased the alternatives allocation to more than 20 percent, adding hedge funds and boosting the plan’s exposure to private equity and real estate. The portfolio now has an 11 percent allocation to absolute-return hedge funds. In January, Exelon put $2.1 billion into the pension fund and Brown ratcheted up the hedge to 40 percent as the funded status improved. The portfolio returned 9.8 percent in 2011, compared with Exelon’s target for the year of 8.7 percent. — Julie Segal

Small Corporate Pension Plan
Michael Chang, Director of Treasury Operations, American Honda Motor Co.

You needn’t be big to get access to the best investments and some pricing power. Not, at least, if you’re Michael Chang. A chemical engineer from the University of California, Berkeley, with a master’s degree from the Marshall School of Business, Chang, age TK, was charged in 2005 with building an investment office from scratch, and he needed to get whatever economies he could in managing American Honda Motor Co.’s now $3.8 billion Master Retirement Trust. Up until that point, Chang had been managing liquidity and financing for American Honda itself, while the human resources department oversaw the pension plan. The plan was 70 percent in equity and 30 percent in fixed income, so he moved from U.S. fixed income to international and added real estate investment trusts. After the worst of the financial crisis, Chang extended duration in fixed income and reduced the reliance on equities for returns. “We de-risked the portfolio when the funding status was good and interest rates were still favorable,” says Chang, who emphasizes that he’ll continue to take excess returns off the table as the future unfolds. Last, Chang consolidated five plans into one and did an asset-liability study that kicked off a new approach. Consolidation gave him the leverage to invest in funds that had higher minimums and get pricing discounts, while the new allocation allowed for increased exposure to alternatives, including funds of hedge funds and direct private equity. The private equity build-out will continue as Chang adds to the opportunistic real estate allocation. — Julie Segal

Large Endowment
Donald Lindsey, CIO, George Washington University

Talk about a change in allocation. When Donald Lindsey took over as chief investment officer of the George Washington University endowment in April 2003, it was one of just a few such large U.S. funds skewed heavily to a single asset class. And that class was real estate, with fully one third of GWU’s assets allocated to commercial, hotel and other properties in the Washington, D.C., area. Lindsey rose to the challenge, actively reworking the now-$1.3 billion portfolio, which, apart from the nonmortgaged real estate, had an oversized allocation to large-cap U.S. value stocks. First, he levered the real estate holdings, adding $100 million to the endowment. Next he deployed the debt proceeds to build up allocations to global equity and private equity — now 26 percent and 21 percent, respectively. But that wasn’t enough to prevent the GWU fund from losing 21 percent of its market value in 2008 as a result of its still-heavy exposure to real estate investments. So Lindsey again went to work, putting a significant amount of capital into convertible, investment-grade and high-yield U.S. corporate bonds. As credit spreads have tightened, Lindsey, 52, has been cutting back the credit exposure to target U.S. small-cap and new Asian equities. His efforts have finally paid off, as the fund generated returns of 20.7 percent for the year ended June 30, 2011, and 5 percent for the five years ended on that date. By comparison, the Wilshire Trust Universe Comparison Service returned 20 percent and 4.49 percent, respectively. — Frances Denmark

Small Endowment
Sean Gissal, CIO, Marquette University

For Sean Gissal, equities are just too darn efficient. Since Gissal arrived at Marquette University’s Milwaukee campus as senior investment manager in April 2005 to help the school’s president modernize the endowment fund, job one has been to diversify the formerly 70-30 equity-bond portfolio, now at $400 million. “Before, we lived and died on how well equities did,” says Gissal. Because stocks are much easier to price than alternatives like private equity or emerging-markets debt, he explains, equities have less upside. “We wanted to focus on asset classes that were the least efficient,” he says. To get there, Gissal, a former analyst at the City of Milwaukee’s $4 billion pension fund, created a 30 percent allocation to a “flexible bucket” with the latitude to take on investments that didn’t fit neatly into existing portfolio categories, such as a distressed, deep-value hedge fund. Another modernizing move: Looking for tighter control over the fund, Marquette’s investment committee converted from an alumni-dominated body to one consisting of senior university staff members, including the vice president of finance and the dean of the business school. The 39-year-old Gissal, who stepped up to CIO in 2007, meets regularly with school officials to better integrate endowment office activities into the wider campus. “The crisis sped up our effort to get our arms around ‘How can Marquette take advantage of this?’ ” he notes. After dropping 30 percent in the year ended December 31, 2008, the fund bounced back strongly, gaining 22.3 percent the following year, beating the 19.2 percent return of the average endowment by a comfortable margin. — Frances Denmark

Large Foundation
Robert Manilla, CIO, Kresge Foundation

Who needs consultants? In 2004 the Kresge Foundation’s board of trustees considered replacing 16-year veteran CIO Edward Hunia with a fully outsourced investment program. Hunia had functioned for years as a one-man shop, assisted by consulting firm Cambridge Associates. But after seeing the success that other foundations and endowments had had with in-house teams, the Troy, Michigan–based board decided in 2005 to bring in Robert Manilla from the nearby Chrysler Corp. pension fund and Jon Gentry, investment officer of the University of Notre Dame, to build out the investment office. Manilla, who was named CIO in 2008 after Hunia’s retirement, essentially turned over the entire Kresge portfolio without outside help. The $3.1 billion fund now has an emerging-markets exposure of 23 percent across the entire portfolio and 41 percent in public equity. Manilla, 50, says such exposure is the largest of any foundation with more than $1 billion in assets. At least one member of the 11-person investment staff — which includes a Mandarin speaker — visits the emerging markets every month. But everyone on the team is a generalist; Manilla says this approach leads to better decision making. “When everybody has coverage in that asset class, we can have a pretty healthy debate,” he says. For the five years ended December 31, 2010, the foundation was up 7 percent, beating the 4.49 percent average five-year return for other foundations and endowments in the Wilshire Trust Universe Comparison Service; it was up 4.5 percent, versus 1.6 percent for its peer group, for the five years ended December 31, 2011.  — Frances Denmark

Small Foundation
Conrad Freund, COO, LA84 Foundation

You may not remember the 1984 Summer Olympics, but Conrad Freund certainly does. Working with existing sports arenas, private contributions and zero taxpayer dollars, Olympic Organizing Committee CEO Peter Ueberroth — who went on to become commissioner of Major League Baseball — tapped Freund as comptroller in 1979, then made him treasurer and CFO of the Los Angeles event. The games concluded with a nearly $250 million surplus, a welcome reversal of fortune following the losses incurred by the 1976 Montreal Summer Olympics. Construction of that stadium alone required $1.5 billion in debt, which wasn’t paid off for 30 years. When the surplus was divided at the L.A. games’ conclusion, $93 million was earmarked for a new foundation to fund amateur youth sports in Southern California. The 66-year-old Freund has overseen the $140 million LA84 Foundation since its 1985 inception, earning an annualized 8.75 percent return and providing a total of $210 million in grant distributions. Freund attributes part of the foundation’s success to long-term relationships with top private equity firms like Blackstone Group, Brentwood Associates and Oaktree Capital Management. The foundation allocates 25 percent to private equity and another 25 percent to hedge funds. Freund notes that asset managers are willing to lower their fees for a good cause or, as he quips, “because it’s a sports organization and a male-dominated industry.” In 2011, when the average foundation earned a –0.73 return, LA84 gained 6.1 percent. — Frances Denmark

Large Public Pension Fund
Lawrence Schloss, New York City Employees’ Retirement System

When Larry Schloss first saw his offices at the New York City Employees’ Retirement System, he was aghast. The paint on the walls was old and grim, and the carpet was horrible. But that didn’t stop Schloss, then chief investment officer of New York–based private equity firm Diamond Castle Holdings, from taking the position. In January 2008, New York City Comptroller John Liu appointed Schloss deputy comptroller and head of the Bureau of Asset Management, which oversees the $150 billion city retirement system. Schloss’ achievements since then have been extraordinary. He implemented a new asset allocation for the system, which comprises five separate pension funds: city employees, firefighters, police, teachers and the Board of Education. The 57-year old and his lean staff have, among other things, started the city firefighters and cops investing in hedge funds, developed a new strategic fixed-income allocation that allows managers to invest in the credit spectrum where they see opportunity and streamlined the private equity portfolio by reducing the number of manager relationships. The pension fund’s performance has improved dramatically, from the bottom decile among large public pension funds before Schloss joined to the top-ranked large public plan in fiscal year 2011, with a return of 23.2 percent. Schloss also got the BAM offices a new coat of paint, though he’s still waiting for a new carpet. — Imogen Rose Smith

Small Public Pension Fund
Lee Partridge, CIO, Portfolio Strategist, San Diego County Employees Retirement Association, CIO, Salient Partners

Investing inside a fishbowl is never easy. Few public pension plans have come under more scrutiny than the $7.7 billion San Diego County Employees Retirement Association, which has experienced more than its share of problems and criticism over the past several years. A former deputy CIO with the Teacher Retirement System of Texas, Lee Partridge took over the CIO responsibilities for SDCERA in September 2009, after the San Diego pension fund decided to retool its portfolio and bring in a new investment chief in the wake of losses sustained in the 2008 market debacle. Hiring Partridge was a controversial decision, not least because he would act as an outsourced CIO, overseeing the pension system while continuing to run his own investment management firm, Integrity Capital (which was subsequently acquired by Salient Partners). Yet the outsourced-CIO model allowed San Diego County to continue pursuing sophisticated investment strategies without being severely hampered by the budget and resource limitations that beset most public funds. With the backing and consent of the board and internal staff, Partridge, 45, has rebuilt the fund’s allocations into a balanced-risk portfolio with a focus on capital preservation. The fund is expected to slightly underperform during rising markets but to perform better than the market in more-uncertain times and to preserve capital in down markets. So far, Partridge’s efforts are working: In highly unpredictable 2011 the fund returned 5.84 percent, compared with 5.44 for its benchmark and 0.86 for the median public fund. Under Partridge the SDCERA portfolio has a larger allocation to passive, beta strategies than it did in the past; that is then combined with a group of active, alpha providers. An efficient-markets disciple, he says, “over the long run the rational structure dominates.” — Imogen Rose-Smith

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