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INVESTMENT EXCELLENCE - Heads of the Classes

Four win Institutional Investor’s annual Awards for Excellence in Investment Management.

Discipline and Focus

Sloan’s Petersen finds exceptional managers across a wide range of investment strategies.

When William Petersen stepped into the job of chief investment officer at the Alfred P. Sloan Foundation in 1998, he already had a long familiarity with its portfolio and board of trustees. The former U.S. equity large-cap portfolio manager at what was then JPMorgan Investment Management had been responsible for overseeing the investment bank’s relationship with the foundation — and monitoring its large, balanced portfolio of stocks and bonds — since 1987. He had even helped the trustees conduct the search for the foundation’s first-ever CIO. But after deciding that none of the candidates they had interviewed were compelling, the trustees turned to Petersen, he recalls, and asked, “Well, what about you?”

Petersen, 59, had spent his entire career at JPMorgan and was ready for a change. The Oklahoma native had moved to New York in 1972 as a newly minted graduate of Indiana University’s Kelley School of Business, joining Morgan Guaranty Trust Co.

Petersen understood he would be a team of one at Sloan, without any support staff, but he relished the challenge: He knew he would have to go far beyond his specialized focus in large-cap U.S. equities and familiarize himself with a range of investments and fund styles.

“I had tremendous freedom when I first got here, which was incredibly liberating,” Petersen says. “The foundation’s president at that time, Ralph Gomory, gave me the latitude to set my own agenda with the investment committee’s support.”

A decade on, the CIO has transformed Sloan’s $1.93 billion portfolio by finding exceptional investment managers across a wide range of strategies — private equity, venture capital and hedge funds, among others — while eschewing managers that use excessive leverage. The results have been impressive. In 2007, Sloan’s portfolio delivered a return of 14.8 percent; over three years, it has delivered an annualized 14.5 percent; over five years, 16.6 percent; and over a decade, 11.5 percent. In the universe of foundations tracked by Cambridge Associates, Petersen’s consistency puts Sloan’s returns in the first quartile for those periods.

As the portfolio has grown, so has the number of managers that Sloan invests with. Petersen and his small team of just two professionals must stretch to span the globe, keeping track of some 65 managers and, when time allows, scouting for fresh talent. He is pleased with the strength of the relationships that they have developed, especially in the wake of the subprime meltdown. “We simply don’t invest with managers who do complex statistical stuff and use a lot of leverage,” Petersen says. “Our philosophy has been to keep things simple and work with fund managers who really focus on making value-oriented, fundamental investments — and it’s a discipline that has served us well.” — Loch Adamson


Oregon’s Schmitz healed a board rift then posted stellar returns in an alternatives-heavy portfolio.

Unflappability helps the best of investors. Consider Ronald Schmitz, the CIO of the $61 billion Oregon Public Employees Retirement Fund, who has consistently racked up topflight returns by staying the course in a portfolio heavily laden with alternatives.

Even as the private equity and real estate markets began to falter last year, Schmitz boosted exposure to these categories by nearly half, to a combined 27 percent of his portfolio. In January alone, Oregon’s pension fund lost nearly $5 billion, but he stayed calm. “We tend to manage with a three-to-five-year window and don’t get overly concerned about short-term blips like this,” says Schmitz, adding that “in the end relative performance matters as much as absolute return.” Over the past year, Schmitz has been deploying more capital overseas and has begun funding an “opportunity portfolio” for investments like energy and high-yield real estate strategies that don’t quite fit into conventional categories.

Schmitz’ equanimity was a major reason the Oregon Investment Council hired him in 2002 after his five-year stint as CIO of the Illinois State Board of Investment. On arriving in Salem one of his first tasks was to heal a rift between warring factions on the board of trustees and quiet a public uproar over a private equity investment that had the appearance of being a sweetheart deal for a former governor.

Boosted by strong returns in private equity, up 26 percent, and foreign stocks, up 16 percent, Schmitz’ portfolio returned 9.66 percent in calendar 2007, compared with a median return of 8.70 percent for public funds with more than $1 billion in assets, according to Wilshire Associates. That put it in the 27th percentile among its peers. For the three years ended December 31, the portfolio returned an annualized 12.69 percent, good enough for a fifth-percentile performance; over five years it returned 14.98 percent, to finish in the sixth percentile.

At 6-foot-4 and some 250 pounds, Schmitz is an imposing figure who speaks in a soft, measured voice. Born in 1953, he’s a humble straight shooter who grew up in middle-class suburbs near Chicago and Kansas City, Missouri. He earned a degree in finance from Macomb-based Western Illinois University in 1975 and studied nights to obtain a master’s degree in finance and marketing from Northwestern University’s Kellogg School of Management in 1981. — Steven Brull

Global Reach

Lundberg lifts Michigan into the top ranks of university endowments.

The University of Michigan may not be the first that comes to mind when lists are drawn up of the leading U.S. college endowments, but don’t blame Erik Lund­berg for that. In the eight years since he was hired to build an investment office, Lundberg, the Ann Arbor–based state school’s first CIO, has lifted the fund to eighth place from 17th in terms of size in the National Association of College and University Business Officers’ ranking of U.S. endowments.

Now, on the strength of superlative returns, Lundberg is fast moving the Wolverines up the ranks of the country’s elite for investment excellence. Michigan’s 25.6 percent total return for its fiscal year ended June 30, 2007, bested those of nearly all of the U.S.’s most renowned private schools, including perennial leaders like Harvard University and Princeton University. It ranked No. 3 among all public universities.

How does Michigan do it? “We have a group of investment professionals who are really good at what they do,” says the low-key Lundberg, 48, a native of Norway who came to the U.S. at 20 to study business at the University of Wisconsin, then earned an MBA from Ohio State University. He stayed on in the U.S., and was rising through the ranks at Ameritech Corp.’s Chicago pension office when the UM regents came calling in 1999.

Lundberg attributes the $7.1 billion endowment’s stellar performance to a combination of active management, opportunistic investments and the ongoing internationalization — now at 40 percent — of a previously U.S.-centric portfolio. “There are opportunities outside the U.S. that didn’t exist five years ago,” says Lundberg, who has visited managers in Europe, Russia and Japan — China is next — with several members of his staff. The CIO has done away with separate international and U.S. equity allocations and has put 56 percent of the assets in alternatives.

The 40,000-student UM desperately needs top performance. At a time when universities like Harvard, Yale and Stanford are doing away with tuition for many students, the Michigan legislature has been reducing support for the university as the faltering automobile industry has sent unemployment to the highest level of any state, according to a December 2007 U.S. Department of Labor report.

Lundberg’s returns make it easier to raise money for the public university. “Erik and his team have helped sell the concept of donating to the school,” says famed deal maker J. Ira Harris, president of financial consulting firm J.I. Harris & Associates in Chicago (and a graduate of the class of 1959). “As someone who chaired a capital campaign, it makes it very much easier when you can tell people, ‘Look at how your money compounds.’” — Frances Denmark


International Paper’s Hunkeler adds asse t classes, ponders changes.

Robert Hunkeler has been at the vanguard of corporate pension investing during his 11 years as vice president for trust investments at International Paper Co. A trained research chemist, Hunkeler was early to embrace liability-driven investing techniques and hedge funds as part of a portable-alpha strategy.

Along the way, he has recorded superior performance for IP’s now $8.5 billion defined benefit plan. IP’s 9.6 percent return last year easily bested the 8.46 percent median performance of U.S. corporate plans, according to data gathered by Wilshire Associates. On an annualized basis, the plan returned 12.0 percent during the three years ended December 31, 2007, versus a median of 10.27 percent; 15.1 percent over five years versus a median of 12.84 percent; and 9.3 percent over ten years versus a median of 7.86 percent.

Born to Swiss parents and raised in Bethesda, Maryland, Hunkeler started as a lab technician at chemicals manufacturer Ciba-Geigy Corp. in Basel, Switzerland. He switched to finance and moved to arch-rival Sandoz, whose defined benefit plan he managed for five and a half years. He joined IP in Stamford, Connecticut, in 1997.

Hunkeler has been quick to anticipate investment challenges and to shift strategies. “To stay ahead of our peers over time, we have to be willing to change,” says the 49-year-old, who candidly admits that he is driven by “a fear of underperforming.”

When he arrived at IP, Hunkeler concluded that its then $3.7 billion defined benefit plan was dangerously concentrated in U.S. large-cap stocks. He did not dramatically change the plan’s allocations, but he embraced a wider range of asset classes, including emerging-markets stocks, high-yield bonds and timber. IP today is 59 percent in equity, 31 percent in fixed income and 10 percent in alternatives. In 2002, Hunkeler altered his fixed-income strategy to more closely match the plan’s liabilities — a timely move: On July 1, 2004, IP froze its defined benefit plan to new salaried employees.

In 2006, Hunkeler began employing portable-alpha strategies, using five hedge funds and eight funds of hedge funds to invest in the U.S. equity and U.S. fixed-income allocations of his plan.

After a flat fourth quarter, Hunkeler is once again reviewing his options. “I will have to devise new ways to win in these markets without a hand tied behind my back,” he says. “The strategy has not changed yet, but it will.” — Michael Shari