CHAPEL HILL, N.C. -- It's barely been seven months since Mark Yusko has taken the helm at the University of North Carolina at Chapel Hill's $750 million endowment fund, but he's already implemented profound changes.
In an interview at the university's elegantly appointed alumni center, Mr. Yusko said his biggest moves so far have been to reduce the fund's fixed-income allocation to 22% from 33% and to increase its international equity component to 15% from 10%.
He is in the process of reducing domestic equities to 25% from 38% -- after slashing it earlier from 43%.
He's also building a private equity program, targeting 15% of assets, up from 3%.
His targets for the fund's asset allocation are 25% domestic equities; 15% international equities, of which about one-third is emerging markets; 10% opportunistic equities; 10% absolute return equities; 15% private equities; 5% real estate; 15% fixed income, of which a third is international; and 5% energy.
Mr. Yusko, 35, previously was the No. 2 investment person at the endowment fund of his alma mater, University of Notre Dame, South Bend, Ind. He's the UNC fund's first chief investment officer. Previously, Wayne F. Morgan, an accountant, oversaw a two-person investment office and ran the fixed-income component internally. Mr. Morgan now manages the fund's fixed-income investments at Wachovia Asset Management, Winston-Salem.
To help him reshape the endowment fund, Mr. Yusko has been building an investment management team, which will number five investment professionals and two support staffers when complete. Including Mr. Yusko, there are five on board so far.
Charles Merritt, previously with NationsBank's investment group in Charlotte, has been hired by the endowment to run its private equity program; Charles Leedy, formerly assistant investment director, is overseeing public markets. Mr. Yusko has received approval from the investment board to add a director of investment operations and two research analysts.
He's also been busy hiring new managers for new strategies since arriving at Chapel Hill. He already has hired six private equity managers, one real estate manager, two energy managers, one domestic equities manager, two international equity managers, one absolute return manager and one opportunistic manager.
So far, he has terminated two domestic equity managers -- Snyder Capital Management, San Francisco, because of reorganization issues, and Trainer Wortham & Co., New York, for performance problems.
"We're re-evaluating all of the managers, but expect to retain most of those we worked with before," Mr. Yusko said.
Historically, the endowment did not invest much in private equity, an area Mr. Yusko intends to expand because of the rewarding returns that come with it. "The fund never had a way to gain access to the best funds, which is why they wanted an experienced officer who could build relationships with top firms," he said.
Michael K. Hooker, chancellor, said Mr. Yusko emerged as the best candidate for the CIO job after the investment board conducted a nationwide three-month search. "We looked for someone who could build an investment office. We wanted to put more money into private equity, so we can get higher yields. We've had too much in fixed income. Mark is a great people person. He also has a firm grasp of the industry and of all kinds of investment vehicles from venture capital to public equity."
John Foster, managing director at Natural Gas Partners, Greenwich, Conn., a venture capital and leveraged buyout company specializing in oil and gas properties, managed money for Mr. Yusko at Notre Dame and is again running a portfolio for UNC. He noted private equity is relationship-oriented, and praised Mr. Yusko for having the connections to "get into the better part of the sector."
"What's more important, is he understands complex investment strategies and then can explain them simply," Mr. Foster said.
Mr. Yusko said he spends a great deal of his time networking to identify superior investment firms and build relationships with them. "It's a process of networking and doing research, similar to the way portfolio managers operate. Just as a portfolio manager might visit a company that he is thinking about buying to check it out, I meet with the money manager, and also talk to his competitors and clients to get the scoop on them."
He estimated he spends 30% to 40% of his time talking with money managers. He is on the phone so much, he wears a telephone headset.
Mr. Yusko plans to transform the University of North Carolina investment office into a premier investment shop and has been spreading the word to the investment community that there has been a fundamental change at the endowment fund -- that he is open to new ideas in new markets, to boost returns.
"I'm looking for great partners with a proven track record. We're on the prowl for novel strategies that solve problems in new ways," he said.
His approach seems to be working. David Kabiller, head of HQR, a New York-based absolute return fund that uses market-neutral strategies, has called to invite the endowment to participate, and Mr. Yusko committed $10 million. Mr. Yusko worked with him when he was at Notre Dame and Mr. Kabiller was with Goldman, Sachs Asset Management. "The real issue is to build a program that can compete with the best in higher education, so we can get the kind of returns in the high teens that the top schools like Yale, Stamford and Harvard get," he said.
Mr. Yusko's other aim is to invest with the best people in the business. He doesn't want to invest with "nameless faceless firms who gather assets, and deliver good solid products to as many people as they can.
"Since we're so small, we don't have to work with a firm that's happy to get the same returns as the index. Instead, we want to work with firms that want to multiply their wealth as well as mine."
Mr. Yusko views the process as if investing for a family office, rather than investing institutional capital.
His goal is to grow the endowment fund to $1 billion over the next two years. "We have incredibly strong donor support, positive cash flow and a strong alumni base, which has barely been tapped, and could bring in a lot of new money," he said.
When Mr. Yusko started as an assistant investment officer at Notre Dame in October 1993, he worked first on public investments and then moved to private equity, building it to 13% of the portfolio from the 3% to 4% allocation it had when he arrived.
He also increased the real estate program to 9% of assets from 1% and energy to 5% from 1%. As part of the investment team there, he helped the endowment surge to $1.8 billion from $800 million during his stint.
"We did well because of the boom market, but we added $200 million beyond the benchmark that we created, and I'm very proud of that," he said. He was especially pleased that one of his recommendations, S Squared Technology, New York, which specializes in technology stocks, added $30 million above its benchmark. Another of his investment recommendations, Security Capital Group, which invests in real estate investment trusts and real estate, doubled in value.
He was happy at Notre Dame, he said, but the UNC job was "the opportunity of a lifetime. They're committed to change, and I have an opportunity to build a program from scratch. I can see staying here a long time."
Since joining the endowment, Mr. Yusko has hired Marsico Capital Management, Denver, to run $22 million in a large-cap domestic growth strategy; for international, with the amount still to be determined, he has hired Oechsle International Advisors, Boston, for its select product, and Nicholas-Applegate Capital Management, San Diego, for its core and small-cap product; for venture capital, $5 million to Weston Presidio, Boston, $5 million to Softbank Technology Ventures, Palo Alto, Calif., and $3 million to Patricof & Co. Ventures, Palo Alto; for real estate, $20 million to Meadowbrook Realty, New York, which invests in six real estate firms; for buyout funds, $5 million to J.W. Childs Associates, Boston, and $5 million to Bain Capital VI, Boston; and for energy, $6.5 million to Natural Gas Partners, and $5 million to Merit Energy, Dallas. And there are three deals pending, subject to final due diligence.