CHEVY CHASE, Md. -- The $11.9 billion Howard Hughes Medical Institute has been making major equity shifts.
Among the changes:
* Some $1 billion in externally managed equities were rebalanced over a three-month period. "We neutralized the large-cap portfolios away from growth. They now have a slight value tilt," said Gregg Hazlett, director of investments. He has hired one high-alpha manager who specializes in concentrated large-cap portfolios and is on the lookout for more concentrated managers who focus on both growth and value.
* A search is under way for core EAFE and emerging markets managers. "We're always on the lookout for good managers. No area is set in stone," Mr. Hazlett said. Hughes will continue to overweight emerging markets, which are 18% of its $2.6 billion in international equities.
* The endowment is considering hiring an external currency manager next year. It now uses an internally managed passive overlay on its international portfolios.
* Small-cap portfolios, overweighted by the endowment for the past year, are under review. "We may keep them, add to them or change the lineup," Mr. Hazlett said.
* Richard Pender, the new managing director of equities, has been remaking the fund's internally managed equity portfolios. He is liquidating a portfolio temporarily parked in futures, and investing the proceeds in the stock market.
Around half of the endowment's $3.9 billion in U.S. equities are internally managed and half are externally managed. All of the international equity portfolios are run by outside managers.
Total restructuring
The overhaul of Hughes' equity portfolios comes as part of a complete restructuring of the fund, begun five years ago by Terry Wolfe, who resigned as chief investment officer in June. Mr. Wolfe continues as an adviser to Hughes through August.
The executive search firm of Russell Reynolds Associates Inc., New York, has been retained to search for a replacement for Mr. Wolfe. In the interim, Mr. Pender, Ellen Safir and R. Jay Kolyer, the institute's three managing directors, are alternating as acting chief investment officer. Ms. Safir now holds the position.
When Mr. Wolfe started, there was little diversity, he said. He bumped the allocation to international equities to its current 22% from 10%. He also raised private market investments to 13% from 7%, and added international private equity, oil and gas, and "significant real estate," he said.
To achieve the changes, he cut back on U.S. equities. The institute's asset allocation is around 33% U.S. equities, 22% international equities, 30% fixed income and 13% private investments, with small allocations to absolute-return strategies and cash.
Most of the $1.6 billion in private investments is invested in funds of funds.
About 96% of the $3.5 billion fixed-income portfolio is managed internally by a five-member team, said Ms. Safir, managing director of fixed income.
"We follow a standard core-plus strategy, which uses a broader array of asset classes than our benchmark, which is the Lehman Aggregate Bond index. It gives us broader discretion," she said. The remaining 4% of the fixed-income portfolio is divided between external high-yield and emerging markets managers.
Performance hurt
The fund's allocation is conservative compared with those of most endowments, which tend to invest less in fixed income. The heavy weighting in fixed income and international equities during Mr. Wolfe's tenure hurt Hughes' performance during what turned out in the United States to be a "go-go stock environment," as Mr. Wolfe described it.
The institute can't add to its endowment by fund-raising. So if there is a downturn in the market, there would be no way to recoup losses. In addition, the institute operates under a spending formula set by the Internal Revenue Service for medical research organizations that requires 3.5% of the endowment be spent on its own employees annually. But the institute also gives grants, meaning it has been spending 5% a year during Mr. Wolfe's tenure.
Mr. Wolfe said he is now considering several career options, which include sitting on the board of a mutual fund company or working in an advisory position in the money management industry in the Connecticut/New York area.
