Revamping Baylor Fills Out New Staff Model

FUNDfire, April 23, 2008

By Whitney Kvasager

Baylor University is filling out a new staffing structure to help implement a reconfigured portfolio and increase due diligence on investment managers. Recruiters say the approach may become the norm as school endowments seek out experienced investment staffers to help capture higher returns.

The new investment staff model adds a second director of investments and divides duties between the two. One focuses on liquid assets, the other on illiquid assets. The school has hired a second analyst who arrives in two weeks. And the school is set to hire a director of operations this summer. The three new positions bring the total number of investment staff members to seven.

“We’ll be able to do deeper and wider due diligence, get closer to each of the managers and each of the funds and make sure we’re monitoring them the way we should,” says CIO Jonathan Hook. “We felt last year that we were starting to get too stretched.”

Charlie Wall, Baylor’s new director of investments, is focusing on the illiquid side of the $1.1 billion endowment. He arrived at Baylor two months ago, following seven-and-a-half years as CIO of the $650 million Texas Tech University. He will be supported by the new analyst.

Wall will work alongside Scott Pittman, who held the position of director of investments ahead of the decision to divide duties between liquid and illiquid assets. Pittman is now focusing solely on the portfolio’s liquid assets and is keeping the same title. He is supported by an analyst who had already been working for the endowment. Both report to Hook.

Recruiters were not used for any of the positions; Hook says general consultant Hammond Associates listened to staffing structure thoughts but that the idea to create a new system came out of internal discussions.

Baylor’s endowment is hiring following a revamp of its asset allocation model last year. It was previously allocated in straightforward asset classes as at the average endowment.

Since last year, the portfolio has been divvied up 42% to market exposure, which includes domestic and international long-only equity and long-short hedge funds. Twenty-one percent goes to an inflation hedge bucket, which includes real assets, such as real estate, timber, infrastructure and natural resources. Twenty percent is allocated to risk reducers, including low-volatility hedge funds and fixed income. The remaining 17% is allocated to return enhancers, which includes private equity and emerging market exposure. Hook says the endowment returned slightly below 21% for the last fiscal year.

Dick Anderson, principal consultant at Hammond Associates– Baylor’s consultant – says unusual staff compositions may become the norm at universities. He says schools are hiring talented individuals as they become available and retrofitting the rest of the staff.

“Given the supply and demand of talent, people are looking wherever they can get the talent. If there’s a terrific hedge fund person, they’ll hire the terrific hedge fund person and work around that,” Anderson says. “And I think that’s the case with Baylor.”

Alvin Spector, partner at Chicago recruiting firm Lantern Partners, says otherwise. He agrees that endowments will need to hire specialists to help capture the higher returns needed to offset rising costs. But he believes they’ll become more strategic in hiring, not more opportunistic.

“I would say the need to be more strategic has never been greater. They need to find people who complement existing skill sets,” he says. “The smaller endowments need to be more nimble in how they hire, because a smaller endowment and a smaller university have constraints on how much they can pay someone.”

He also believes that endowments will cope with a smaller pool of people to hire from by training and promoting from within, similar to succession programs at Harvard and Northwestern universities.

“You’re going to see more focus on mentoring existing staff members, who will turn around and mentor junior people. And there will be a greater emphasis on retention going forward than there has been,” Spector says. “They’re going to have to come up with strategies that produce returns consistent with hedge fund strategies. They’re going to have to become more aggressive in their hiring and really search for talent and create reasons why someone out of the private sector should join a university endowment.”

Hook declines to say how much each investment staffer is paid, but says the university is looking for new ways to hold onto the staff it hires. Both Wall and Pittman will receive a bonus that will hinge on objective and subjective terms – a benefit Hook hopes soon to extend to all investment staff members to help retain the talent and to “help create a culture and good teamwork within the office. We want everyone to feel good about coming to work.” He declines to discuss details of the bonuses.

Hook says that once in place, the new staff will be able to devote more time to global markets and gradually increase the fund’s international exposure.

Charlie Wall says current market conditions may offer some interesting opportunities. He also says that while an attractive compensation package was part of Baylor’s draw, there were other reasons to make the move, including more autonomous governance than at Texas Tech.

“Given the state of the economy and the liquidity/credit situation, you’re going to have to look pretty hard at private equity. A couple of things stand out: distressed debt and bank loan funds,” Wall says.

On the real assets side, Wall says energy may be the greatest opportunity, along with real estate and infrastructure.

“I don’t think you can have a conversation about real assets without having a conversation about infrastructure. It’s crumbling around the world,” he says.