When Timothy Jarry ascended to the role of chief investment officer in 2011 at the College of the Holy Cross, his alma mater, he undertook a yearlong portfolio review of the endowment. Looking to maintain (or increase) commitments to many external managers across equities, hedge funds and private equity, Mr. Jarry took a sidestep: He brought some of the portfolio in-house for the first time.
Adding a handful of exchange-traded funds to the investment mix, primarily in global equities, he greatly increased the endowment's flexibility for managing capital gifts, manager transitions and portfolio rebalancing while reducing investment cost. According to Mr. Jarry, ETFs make up anywhere between 5% and 7% of the endowment, moving as high as 10% at times, depending upon gifts and cash flows.
The endowment at Holy Cross, Worcester, Mass. supports about 15% of the college's annual operating budget, with a target to use roughly 4.5% of the endowment's fair value based on a three-year moving average with a one-year lag.
At roughly $685 million as of June 30, the endowment makes the most of its small staff by using ETFs, particularly when collective trusts, separately managed accounts and even institutional mutual funds add complications or expense. Roughly 60% of the portfolio sits in investments with quarterly (or better) liquidity. Externally, the college works with about 35 managers and about 60 strategies, including mutual funds, hedge funds and private partnerships.
Pensions & Investments spoke recently with Mr. Jarry on how he and his staff have used ETFs.
Pensions & Investments: What were the circumstances that led
you to bring assets in-house with exchange-traded funds?
Mr. Jarry: When I took over as CIO in January 2011, we had a lot of managers in the portfolio and small positions that weren't going to move the needle. I wanted to concentrate the portfolio with our high-conviction managers, so we spent a year and a half in review. With greater concentration, we found we would need to create a mechanism with which to rebalance so we created “the liquidity allocation” using ETFs.
When we took our proposal to the investment committee of the board, it was a fairly easy sell. We said “here's the list of high-conviction managers we want to stay with, so we devised this structure to accommodate that.”
P&I: How do you view the role of ETFs for the endowment?
Mr. Jarry: We use ETFs mainly for rebalancing the long-only equity portfolio allocation, specifically across U.S., developed and emerging markets. Additionally, when we take in cash from gifts or from a fund distribution, and the endowment doesn't have to make a payout, we'll equitize it through the liquidity portfolio. It really serves two purposes and, with the ease of implementation, allows us to spend our time evaluating managers and policies that can have a greater impact on the bottom line. ETFs help us to run a more concentrated portfolio of our best ideas, while enabling us to allocate our time to areas of the portfolio where we can add more value.
P&I: How do you evaluate whether the endowment is making the most of the liquidity portfolio?
Mr. Jarry: We regularly re-evaluate the funds we use, focusing on tracking error and liquidity and, of course, cost. I stress that this is not where we are looking for alpha or making a tactical play. Overall, we assess our exposures at the end of each month and use the capital in the ETF sleeve to rebalance back to our target allocations. To manage costs, we negotiate commissions with our broker and periodically go out to the market. While there's a major focus on trading spreads, we are primarily using large, liquid funds and spreads tend to be insignificant.
P&I: Would you consider expanding your ETF usage?
Mr. Jarry: Beyond the rebalancing, we don't see much expansion in our ETF use. We're investing the endowment for perpetuity and feel that over time, active managers with a long-term focus are better suited to our goals.
It's not something that we anticipate becoming a bigger part of the portfolio, but a tool that enables us to stay with those high-conviction managers.
P&I: Are there other ways that ETFs have increased the endowment's flexibility?
Mr. Jarry: The ETF portfolio can be particularly useful in putting cash to work during a capital campaign or any time gifts come in. It allows us to maintain some extra capacity for our active managers when there is space available. n