The way we did it, we basically had some discussions around it, namely the different models, and then we literally started with our investment policy statement, and lined up the different responsibilities the board, the staff and the consultant traditionally manage.
For instance, tactical decision-making: We decided that we wanted to give the adviser discretion to make tactical decisions within the approved policy guidelines. Anything that went beyond the policy would have to be approved by the board.
Liquid investments vs. illiquid investments — again, pretty much all discretion was given to the manager, the adviser, to make choices for liquid investments, but when we turned to illiquid investments, it had a tail that could go from six to 15 years. The committee wanted to have conversations about liquidity, understand the context of what that liquidity would mean not just for the endowment, but for the balance of the college going forward.
So, again, we sort of went through those different areas and presented this is where we think the board would be comfortable with their responsibility, primarily policy-related issues; here's where we think the staff would be complementing the investment adviser; and these are the areas of discretion and non-discretion that the investment adviser would have.
So, again, it wasn't complete outsourcing. It was sort of putting constraints around the different areas of responsibilities in managing a portfolio. One of the considerations that we had was making sure that we selected an adviser that had access to what we would consider best-in-class managers.
So there was a scale to the outsource provider. ... Some committees use their board members to sort of open doors into ... compelling investments. Turning to a consultant like this, we wanted to make sure that they had a deep base of having views to take.
In the two years that we've been with Cambridge ... at no point did they ever make an investment without telling our board that they were going to do it. It wasn't like, you know, they came in and said, “We met last June, and you know, over the past three months we made the following changes.” That's never happened.
They approach the committee with “We've gone through our internal process” — remind the committee that they have their own internal investment committee where their team makes recommendations, it got approval — “and these are the changes that we are going to move forward on.” And they're not asking for approval, they're just sort of, you know, looking for an endorsement, almost to have a discussion to say “These are the reasons we're making these tactical shifts.”
It's not a black box, this outsourcing. It's still a very open communication.
(On) the issue of fiduciary responsibility: Again, the bottom line is the board retains the fiduciary responsibility over whether it decides to hand out certain responsibilities; it's still responsible. That's something we'll be doing probably over the next six to 12 months — evaluating Cambridge now that they've had the portfolio for a full year or so, year and a half, and have implemented it, evaluating it in the areas that they've been given discretion.
So I think you'll see the role of the committee evolve from ... choosing within three great investment ideas for a particular asset class, to OK, this is why we hired the adviser, these are the reasons, and let's evaluate — not just the board evaluate, but the staff evaluate.