Northwestern University CIO eyes ‘transformational' growth

A year into her role as vice president and chief investment officer of Northwestern University's $14.9 billion endowment, Amy C. Falls has revamped the fund's real asset portfolio, reorganized the way investment staff work together and has high hopes of increasing the size of the fund.

"I love the challenge, the sense of purpose and the caliber of the institution," Ms. Falls said in a wide-ranging interview at Northwestern University's 21-member investment office in Evanston, Ill.

"I like the idea of pushing the size of Northwestern's endowment up. It should be larger. It's exciting to come to a great university and to work toward an upward trajectory. If we get this right, it could be transformational," she added.

She also is enjoying teaching an undergraduate course — Investments: Theories and Practice of Investment Management — which is open to Northwestern seniors.

Ms. Falls joined Northwestern on May 3, 2021. Previously, she was CIO of the $2 billion endowment of The Rockefeller University, New York, a biomedical research institution.

She replaced William H. McLean, who left in January 2021 to become president and CIO of Richmond, Va.-based Spider Management Co., which oversees the $3.3 billion University of Richmond endowment.

Another goal at Northwestern, Ms. Falls said, is to position the endowment among the top quartile of its peers in terms of returns.

The endowment's annualized returns topped those of its composite benchmark in all measured periods at its Aug. 31 fiscal year-end, with a 37% return for the one-year period, (benchmark, 30.2%); three years, 14.6%, (13.8%); five years, 13.1%, (12.6%); 10 years, 10.2%, (9.7%); and 20 years, 9.1% (8.2%).

Ms. Falls said the asset allocation changes for the endowment since she joined a year ago weren't radical, but the team did redefine the endowment's real assets portfolio.

"For years, real asset portfolios have been a hodgepodge of different strategies that vary greatly in terms of risk and return characteristics," Ms. Falls said, noting that rising equity exposure and the potential for higher inflation led her team to make changes to the real assets portfolio, which totaled about $1.9 billion as of Aug. 31.

The real assets portfolio is now split into three broad, separate asset allocation categories: equity-oriented, income-oriented and store-of-value, Ms. Falls said.

The equity-oriented part of the portfolio includes mining and exploration and opportunistic real estate partnerships and entail a higher degree of operational and financial risk. Returns for this portfolio are expected to be between 10% to 12%, Ms. Falls said.

The income-oriented real assets category is a bond equivalent that focuses on investment in core real estate, royalty funds, timber, agriculture and Treasury inflation-protected securities. These investments' primary source of returns is a cash-flow stream generated by the underlying assets that usually are linked to price increases. Expected returns are below 4%, Ms. Falls said.

The store-of-value real assets sleeve can invest in gold, cash, art and other goods. She said the expected return for the store-of-value category is between zero and 2%.

Including the changes to the real assets portfolio, the endowment's new target asset allocation adopted in September is 20% venture capital; 15% private equity; 10% U.S. equity; 9% global long/short equity; 8% uncorrelated strategies; 6% each developed markets equity, emerging markets equity, multistrategy, equity-oriented real assets and fixed income; 4% each income-oriented real assets and credit; and zero to store-of-value real assets.

In contrast, the target allocation as of Aug. 31 was 27% private investments (global buyouts and venture capital), 20% absolute return, 19% international equity, 14% real assets, 12% U.S. equity and 8% fixed income.

The combined 10% target allocation to the real asset categories in the endowment's current asset allocation is 4 percentage points lower than the prior allocation.

Ms. Falls said the investment team reduced "private equity-like real assets — mostly real estate, energy, oil and gas" as part of the change.

In a report outlining the real assets change, staff said, "We can achieve a better overall portfolio outcome by diverting some of the equity exposure embedded in equity-oriented real assets into higher returning private equity and venture assets while incorporating a moderate allocation to income-oriented real assets to dampen volatility."

In addition to revamping the endowment's real assets portfolio, Ms. Falls also initiated changes to the rather traditional organization of the endowment's investment team with an eye toward cross-fertilization between teams and the recognition that some money managers' businesses are evolving to provide a broader range of strategies.

Ms. Falls said the organization now assigns a manager to oversee and track between 15 and 18 money managers with two people backing up the leader. The teams have broad strategy coverage but are not asset class-based like the previous structure, Ms. Falls said. "We want to have better alignment with money managers and better cross-fertilization across asset classes. The result is more eyes on each money manager relationship that allows for deeper thinking," she said.

While the change is still in its early stages, "in some ways, staff already were working this way. It's a very collaborative team," Ms. Falls said.

The investment office has designated a staffer to check the diversity, equity and inclusion practices of the endowment's external managers annually, Ms. Falls said.

"My theory of change is to force managers to talk about diversity, and we do talk with our managers about diversity. I think the pace of increasing diversity has accelerated, and I think there has been a lot of progress," Ms. Falls said.

The Northwestern investment office itself "has good gender diversity," Ms. Falls said. Nearly half (43%) of staffers identify as female and 29% of staff broadly defined as Asian, Latin, Southeast Asian and African American.