Peter Gilbert’s reputation for sophisticated fund management was well established when he traded 14 years at the helm of the $60 billion Pennsylvania State Employees’ Retirement System for the CIO post at Lehigh University’s $1 billion endowment. But nothing could have prepared him for the financial crisis that was just getting under way the day he arrived on the Bethlehem, Pennsylvania, campus to start up an investment office in August 2007. It turned out to be his lucky break.
Gilbert, who oversaw the creation of the largest hedge fund allocation at any state pension fund — a full 20 percent of PennSERS’ portfolio — is a big believer in the alternative-investment-packed endowment model pioneered by Yale University’s David Swensen.
“The endowment model has outperformed historically over a long period of time through different cycles,” notes Gilbert, who began to make preparations to pump up Lehigh’s alternative-investments allocation to 50 percent from 15 percent after the school’s investment subcommittee and finance committee approved his plan in 2008.
That change meant cutting the equity allocation from 60 percent to 40 percent and reducing fixed income from 25 percent to 10 percent. After hiring two investment professionals, Gilbert began to transition the portfolio, recognizing that the move into alternatives could take a few years. “There’s no point investing in private equity or hedge funds unless you can be with active managers who have the skill set to add value,” he explains.
As Gilbert moved money away from traditional managers in early 2008, he began to accumulate cash when markets proved too rich to build the new allocation. “It was the first time in my life that I decided to sit on a fair amount of cash,” says Gilbert. “Toward the end of the year, things started collapsing. It was a fortuitous time.” Another benefit: When Gilbert eventually was ready to allocate funds, he had access to best-of-breed hedge funds that had previously been closed.
Maria Chrin, chairman of the investment committee and a 1987 Lehigh graduate, agrees with Gilbert’s decision to stay in cash. “When the knife is falling, that’s when you want to be thoughtful about deploying money,” she notes. As the financial crisis picked up steam, Chrin, a former Goldman, Sachs & Co. wealth manager who in 2003 co-founded Circle Wealth Management in Summit, New Jersey, and New York, put an additional committee meeting (there are now five) and extra conference calls on Lehigh’s annual calendar.
When Lehigh was looking to hire its first CIO, the selection committee contemplated locating the university’s investment office in New York or Philadelphia to make the position more attractive to potential candidates. Gilbert would have no part of it. His desire to remain on campus as a full member of the senior officers’ team has made communication much easier, says Margaret Plympton, vice president of finance and administration at Lehigh, who oversees the $400 million annual operating budget.
She credits the close communication between her office and Gilbert’s as an important element of their success in steering the school’s assets through the storm. Plympton, who believes in fiscal conservatism, points to the collar on Lehigh’s endowment spending, which prevents the annual payout to the operating budget from either growing by more than 10 percent or decreasing from the previous year.
At the height in February 2009, Gilbert had 20 percent of Lehigh’s endowment in cash (the position is now down to 2 percent). That, however, wasn’t enough to help Lehigh escape the financial crisis unscathed. The school’s once–$1 billion endowment fund sank below $900 million before shooting back up to about $970 million at the end of July. Still, the loss — 18 percent in the fiscal year ended June 2009 — is only slightly better than the 19 percent average loss for endowments and foundations in the Wilshire Trust Universe Comparison Service.
Lesson learned: Make sure you have liquidity to deal with liabilities, Gilbert says. “If we make any change to the asset allocation,” he adds, “it will be to have a little more cash.”
