Casey Family Programs decides to bring $2.2 billion in-house

SEATTLE — Not everybody thinks outsourcing is such a great idea.

In fact, Casey Family Programs, Seattle, has bucked the trend, pulling back the foundation's $2.2 billion in assets, which had been managed entirely by Russell Investment Group, Tacoma, Wash.

The move is designed to enhance returns for the foundation, trim fees and give foundation officials greater control over the assets, explained Gloria Reeg, chairwoman of the foundation's investment committee.

Ironically, Ms. Reeg was head of Russell's global consulting practice until April 2001, when she left the firm. She still believes in the virtues of outsourcing, but thinks institutions with at least $1.5 billion in assets can take care of themselves.

"Russell recognizes that foundations of all sizes ultimately need to assess their own capabilities and priorities, and decide whether outsourcing or building capabilities in-house is a better fit for their organization," said Jennifer Tice, a Russell spokeswoman, in an e-mail to Pensions & Investments. "We respect the decision the Casey family foundation has made and wish them well as they seek to achieve their investment goals."

"We absolutely believe that multimanager programs are appropriate for all levels of institutional clients — including the larger markets. In fact, we're seeing more institutions interested in outsourcing their investment management and pension administration functions," Ms. Tice added.

With the help of consultant Ennis Knupp & Associates, Chicago, where Ms. Reeg also has worked, Casey trustees have tuned up the foundation's asset allocation. In particular, they set a new 5% allocation to private equities, boosting the total target equity allocation to 65% from close to 60%.

Meanwhile, trustees have dropped their 5% allocation to a hedge fund of funds managed by Russell. Casey officials want to understand their exposures and want a better fee schedule than a fund-of-funds program charges, Ms. Reeg said, adding many of the strategies offered by hedge fund managers are attractive.

Plans are to expand the foundation's real estate and international investments, but details will await the hiring of a chief investment officer, a new position. Heidrick & Struggles, Chicago, has just been hired to conduct the search.

The plan to bring manager selection and oversight in-house reverses a move to outsourcing made seven years ago.

In March 1999, Casey Family Programs had outsourced its entire $2 billion portfolio to Russell. The foundation — which was created by United Parcel Service Inc. founder Jim Casey in 1966 — had one quarter of its assets in privately held UPS stock, and foundation assets leaped 50% after the company went public in November 1999. UPS stock jumped to 47% of total assets following the initial public offering. (Some $600 million in foundation assets was spun out into a separation foundation, the Marguerite Casey Foundation, in late 2001 and early 2002.)

Now, Ms. Reeg said, the Casey Family Programs is in a better position to oversee its own assets. For one thing, the board has become more financially savvy. Besides Ms. Reeg, who joined the board last June, other recent additions include Gary R. Severson, a former chairman of First Interstate Bank of Washington, and Dennis Hightower, a former Walt Disney Co. executive. The board has also created the governance structure to better monitor investments, she said.

Hiring staff to oversee foundation assets will create the internal expertise. "We hope to hire a CIO in the next six months," Ms. Reeg said. Foundation officials also plan to hire one analyst initially, and more down the road.

As Russell's global head of consulting, Ms. Reeg was familiar with Casey Family Programs officials, although she did not manage the account herself. Still, she maintained the connection with the foundation, which provides and improves the quality of foster care and promotes changes in child welfare practices.

Ms. Reeg won't give away too many details on the foundation's investments, but she emphasizes its equity-heavy content.

While Russell was terminated as of Jan. 31, foundation officials hung on to some of the underlying managers for equities, fixed income and real estate. She wouldn't name them.

Trustees plan to move the real estate portfolio to its long-term target of 10% of total assets, from 7% now. Ms. Reeg expects the portfolio to expand into value-added and opportunistic investments. Now, the foundation invests only in open-end core real estate.

The increase in real estate investments will help offset the recent $52 million sale of Casey foundation headquarters, which the organization is now leasing back.

The board still is examining its international allocation, both in stocks and bonds. "That's not finalized, but it will be very, very significant," she said.

In fixed income, the board is looking at some strategies that are sensitive to inflation, such as Treasury inflation-protected securities and commodities, she said. Currently, the foundation's fixed income allocation is invested in core-plus strategies.