Ellen Ellison, CFA (Chief Investment Officer)
Ned Creedon, CFA (Director of Private Investments)
Brett Snidtker (Director of Public Investments)
Q: What distinguishes a quality endowment investment program?
A: Each institution has unique needs that influence long-term return objectives, risk tolerance, and ultimately, investment philosophy. However, we believe that there are a few common characteristics that help distinguish the most successful, well-established investment programs that can be applied to the University of Illinois’ endowment. We created the Statement of Guiding Principles when we initially built the investment office that begins with these five key principles that distinguish successful endowment programs:
- Experienced and entrepreneurial investment committees with good governance
- Sufficient staff and technological resources
- Access to best in class investment managers who are aligned with our institutional mission
- The ability to communicate with many different constituencies that an investment in the endowment is critical to supporting the mission of the University today and into the future
- Continuity of investment team and board leadership
In addition to the above tenets, we have identified other concepts and principles that detail what we look for in investments, managers and governance.
Q: What are the strategic goals for management of the endowment program?
A: Our mission is to grow the endowment capital via long-term investments and donations. To paraphrase Albert Einstein, compounding interest is the most powerful force in the world. However, executing on our mission is far more complicated.
It begins with clear and strong governance at the Board of Directors level. The Foundation has been fortunate to have a talented and thoughtful Investment Policy Committee that drives asset allocation decisions and helps with the oversight of the Investment Office. A strong governance structure during the Investment Office’s formation in early 2013 created a clear division of responsibilities between the Committee and the investment team, who work together to maximize performance through a combination of asset allocation and manager selection.
Q: What are the strategic goals for endowment performance?
A: Our immediate goal when it comes to performance is to meet or exceed the minimum required return calculated as follows:
Minimum Required Return = Annual Spending Rate + Administrative Support + Inflation
Exceeding this target, which fluctuates over time, allows us to accomplish our mission of supporting the University, while also compounding the principle of the endowment over time. Interestingly, with inflation measures rising currently for the first time in many years, this increases the minimum return that we must meet.
How do we accomplish this? The answer to that question is a combination of things we touched on in the previous questions:
- A strong governance framework
- Good leadership via the Board of Directors
- An investment office that can look beyond near-term market events and focus on finding attractive long-term investments
This is where asset allocation, driven by the Investment Policy Committee and investment office, combined with manager selection come into play. Our endowment’s objectives and investment philosophy drive our asset allocation to reflect a long time horizon, a strong equity bias, a willingness and ability to hold less liquid investments in exchange for excess returns, and an open-minded approach to what may otherwise be non-consensus or currently out-of-favor investment strategies. This last point is crucial, as we are often sowing the seeds for future performance when things may seem to be at their least attractive. Having the ability to step back and look at an investment through a longer-term lens is very important.
Some of the characteristics we look for in prospective investment managers include:
- Focused approach – our experience has taught us that firms with a single investment strategy, rather than firms with many different products to offer, tend to be better investments for our style of investing. It is simpler to diligence and understand the structure, economics, attribution, etc.
- Clearly identifiable and repeatable investment process – in some cases, we can spend years getting to know prospective investment managers. During this time we walk through numerous investment examples to understand the depth of their diligence and look for the consistent application of their investment process, from sourcing to sizing to exiting. This often includes traveling with the manager to meet company management teams and/or review individual assets we may hold. We believe this boots-on-the-ground approach helps set us apart from other investors.
- Partnership and transparency – we look for managers who view an investment from the Foundation as both a fiduciary and as a partner. We do not invest with managers who are not willing to share all details of their portfolio if asked or who charge egregious fees.
- Smaller and newer firms – while not a requirement, we are experienced and comfortable hiring smaller, simpler investment managers. These are often cases where an investment from the Foundation can get attractive fees, which ultimately translates into more capital to help support the University. Additionally, when we are the first institutional investor in a fund, it can help put that manager “on the map” for other institutional investors. We have found that managers, generally speaking, tend to be better performers earlier in their life cycle and being an early partner of theirs helps UIF forge a strong, long-term relationship, hopefully for decades to come.
