Smith College parts with OCIO, will manage its assets in-house

Smith College plans to hire its first chief investment officer and manage its $2 billion endowment internally after using outsourced CIO Investure LLC for 16 years.

An open letter to students, staff, faculty and alumni signed by Smith College President Kathleen McCartney and board Chairwoman Alison Overseth said the Northampton, Mass.-based school’s board of trustees “has decided to establish its own in-house investment office” after having “outsourced the management of its endowment to Investure” since 2004. The decision was made “following more than a year of deliberation.”

As Smith College winds down its portfolio with Investure, the school will continue to work with the firm over the next few years to ensure a smooth transition, confirmed David DeSwert, Smith College’s vice president for finance and administration.

“It has been an honor to partner with Smith College for so many years. Investure was founded on the premise of serving non-profit institutions, with the goal of generating excellent long-term investment performance,” said Bruce Miller, CEO of Investure, in a news release issued by Smith College. “We are proud of our role in helping Smith successfully grow their endowment, and we look forward to supporting Smith in the coming years in this next phase.”

The endowment has more than doubled from around $900 million when Investure was hired.

Investure Chief Operating Officer Puja Seam said in an email the firm had no additional comment beyond Mr. Miller’s statement.

Size appears to be the main reason the school is making this change. Simply put, the board feels the endowment is big enough to manage the portfolio itself.

“Given the current size of our endowment, Smith has become an outlier among higher education institutions that outsource their endowment management,” the letter stated, adding that establishing its internal investment office will allow the school to “further customize (its) investment strategies to Smith’s specific needs and exercise greater direct control over (its) largest financial asset.”

As of June 30, the endowment had a 34% allocation to global equities, 31% private partners, 27% alternative equities, 6% fixed income, and 2% cash and miscellaneous.

Executive recruiting firm David Barrett Partners will assist the school in seeking its first-ever CIO. Once hired, the new CIO will be responsible for establishing and staffing an investment management office to run the endowment.

A Smith College spokeswoman said that the school has not yet announced a time frame for hiring its new investment staff.

Smith College is joining the ranks of other large endowments looking to manage their assets themselves. According to the 2019 NACUBO-TIAA Study of Endowments released in January, roughly 75% of schools with endowments exceeding $1 billion had an internal investment office.

Speaking generally about large college endowments, Kenneth E. Redd, senior director, research and policy analysis at the National Association of College and University Business Officers, Washington, explained that one advantage these endowments have in using internal staff to manage their assets is greater control of hiring and firing managers and access to more firms, particularly those that manage private equity and other alternative strategies.

Charles A. Skorina, founder of San Francisco-based executive search firm Charles A. Skorina & Co., which specializes in the hiring of CIOs, said in a phone interview that he found Smith College deciding to begin managing its portfolio itself to be “interesting” but “certainly not unexpected,” given that “most non-profit institutions like to manage their assets in-house” once their portfolios reach $1 billion.

“When you’re over $1 billion, and Smith is now over $2 billion, you want to run things in-house because you can keep track of what you’re investing in,” Mr. Skorina added. “When your program is $2 billion, it really is a good idea to run your business in-house. You can attract good people and custom tailor your (investment management) program to the needs of the school.”

One headwind Smith College could face switching management of the endowment is extracting its existing positions within private equity or venture capital investments. But even given that potential logistical challenge, Mr. Skorina said that “the benefits” to Smith College managing its assets “outweigh the disadvantages.”

NACUBO's Mr. Redd said another challenge that large endowments managing their own portfolios face is cost. “If schools want to manage their own endowments, they have to hire staff and pay other setup expenses,” he said.

Mr. Redd added that schools with larger endowments typically pay more in investment fees, not just because they have more assets to invest in but also they tend to invest more of their assets in private equity and other more expensive alternative strategies.

Citing data from NACUBO’s 2016 endowment study, Mr. Redd noted that institutions with more than $1 billion in assets, “which tend to have more complex portfolios requiring a higher degree of active management,” paid an average of 74 basis points in asset manager fees. Meanwhile, smaller endowments with less-diversified portfolios paid 44 basis points.