Chief Investment Officers Research Articles

Paying Managers of Complex Portfolios: Evidence on Compensation and Performance from Endowments

Abstract We examine compensation for endowment Chief Investment Officers (CIOs) overseeing portfolios with significant allocations to alternatives. We find widespread use of bonuses and that large endowments with high alternative allocations hire CIOs with stronger backgrounds, pay them more, and have higher pay-for-performance sensitivity. We find weak evidence of a relationship between compensation and future performance. Our results align with contract theory predictions but differ from empirical findings on pension funds. Endowments pay CIOs more, rely more on bonuses, attract more experienced professionals, and have lower turnover than pensions. This suggests more effective talent management compared to politically influenced public pensions.

Searching for and evaluating outsourced chief investment officers

AbstractThis study analyzes the impact of the outsourced chief investment officer (OCIO) index and OCIO search consultant on asset owners' selection of OCIOs. We adopt an agent‐based model with a reinforcement learning method by defining the OCIO search problem as a multi‐armed bandit problem. Our model highlights the significance of the information regarding potential managers provided by the OCIO index and an OCIO search consultant. Our simulation results indicate that the more managers in the market, the harder it is for asset owners to identify the optimal OCIO. If asset owners place greater emphasis on their preferences when evaluating OCIOs, those challenges might be eased. Our results suggest that OCIO search consultants and the OCIO index can support asset owners' decision‐making.

Is OCIO superior in asset allocation performance?

This study aims to empirically analyze the asset allocation capabilities of Outsourced Chief Investment Officers (OCIOs) in Korea. The empirical analysis used data from 35 funds that were evaluated by the Ministry of Strategy and Finance from 2012 to 2020. The results of the analysis are summarized as follows. First, this study found that funds that adopted OCIO improved their asset allocation performance. Second, the sensitivity between risk-taking and performance decreased for funds that adopted OCIO. Third, it is found that OCIO adoption improves a fund's asset management execution (tactical capabilities). This study has methodological limitations in which the methodology used in this study is not based on theoretical prior research, but on practical applications. However, considering the need to clearly analyze the capabilities of OCIO and the timeliness of the topic, this study is valuable and can provide meaningful information to funders who are considering adopting OCIO in the future.

Investure, LLC: Investing in Alternative Assets

In July 2019, Bruce Miller, CEO of Investure, LLC (Investure), an outsourced chief investment office (OCIO), is preparing a proposal for Franklin and Marshall (F&M), a small liberal arts college located in Lancaster, Pennsylvania, with an endowment of $350 million. F&M recently began a search to find a new endowment manager in hopes of improving its investment returns and access to alternative assets (AA), such as private equity (PE) and hedge funds. Investure offers outsourced investment-management services to endowments and foundations (E&Fs) with assets less than $2 billion and is one of several companies competing to win the mandate to manage F&M's assets. Investure's approach is to pool the assets of like-minded institutions and significantly increase their allocations to PE. Miller and his team are preparing to meet with the F&M board's investment committee to describe Investure's services and approach to investment management.This case is designed to introduce students to AA and the distinctions among PE, hedge funds, and private capital within this asset class. It focuses primarily on why PE is a difficult asset class to manage and describes several channels available to small endowments like F&M to access PE. The case introduces students to the core vocabulary of PE investing and limited partnership agreements. To make the concepts and terms more concrete, it provides a simple exercise that asks the students to calculate the expected internal rate of return (IRR) on an investment made through a traditional limited partnership (primary fund commitment) and a fund of funds and compare those to Investure's approach. Students must evaluate and discuss the feasibility and attractiveness of each alternative to F&M. In doing so, the case creates an opportunity for students to discuss the current trends and issues many E&Fs confront as they attempt to increase allocations to PE.The case is appropriate for use in an introductory or early class in courses focusing on PE, venture capital (VC), and entrepreneurial finance, as well as in specialized courses for fund trustees interested in AA. The case can be used for the following purposes:1. To introduce students to AA and how they differ from public equities and fixed income.2. To introduce students to the core vocabulary of PE investing and limited partnership agreements.3. To introduce the channels of access to PE investment and evaluate the advantages and disadvantages of each.4. To analyze the returns to limited partners who choose to pursue PE investment under a traditional limited partnership and a fund of funds and compare those to Investure's OCIO model.5. To familiarize students with the current trends and issues motivating the growth in outsourcing of endowment management. Excerpt UVA-F-1971 Feb. 2, 2021 Investure, LLC: Investing in Alternative Assets In July 2019, Bruce Miller, CEO, of Investure, LLC (Investure), an outsourced chief investment office (OCIO), was reviewing the proposal his team would make in an attempt to gain its newest client, Franklin and Marshall College (F&M), a small liberal arts college located in Lancaster, Pennsylvania. F&M had recently started a process to select a new manager for its $ 350 million endowment. In learning more about F&M, Miller felt it was the kind of like-minded endowment and foundation (E&F) his firm targeted, but knew he would face stiff competition to win the mandate. Miller had been recruited to Investure shortly after its founder, Alice Handy, started the firm in 2003. At her previous position as CEO of the University of Virginia Investment Management Company (UVIMCO), Handy had produced a successful track record by increasing the endowment's investments in alternative assets, such as private equity (PE) and hedge funds. Together they had worked to land Investure's first client, Smith College, with a nearly $ 1 billion endowment in 2004. From there, the firm had grown to 12 clients and $ 14 billion in assets under management (AUM) (Exhibit 1). . . .

COMMENTARY: Wake Up!

The chief investment officers (CIOs) of the most important institutional portfolios in the US should have a solid grasp of key private equity facts before investing in this illiquid and oversubscribed asset class. If an investor does not already have a good understanding of the essentials of private equity research, this issue of The Journal of Investing is a good place to start. TOPICS:Private equity, real assets/alternative investments/private equity, performance measurement, fundamental equity analysis, equity portfolio management, pension funds, foundations & endowments, manager selection

투자심리와 거시위험이 자산가격에 미치는 영향

투자심리와 거시위험이 자산가격에 미치는 영향

Effectively managing risks in an ESG portfolio

Environmental, social and governance (ESG) integration into active and passive portfolios is now a key part of the fast-growing area of sustainable investing. As portfolio managers integrate ESG into their strategies, they add new components of risk that are in addition to the traditional financial risks familiar to chief investment officers (CIOs) and risk managers. In this paper, the author reviews ESG risks from the practitioner’s point of view, including risks found in ESG data itself that stem from the definition, collection and aggregation process. The author then discusses the portfolio characteristics associated with integrating ESG data as well as the challenges in building tools to measure risk and report on attribution. Next, he looks at connections between screening and reputational risks and the beneficial role that engagement can play. Finally, he discusses tail risks and reviews the role that physical climate risk plays in managing portfolios.

Does Chief Investment Officer Pay Reflect Performance? Evidence from Non-profits

This paper examines the compensation of Chief Investment Officers (CIOs) of nonprofit endowments, which have different economic models and monitoring arrangements than those of other institutional investors. We find that compensation reflects the demands of the job, abilities and experience that individuals bring to the job and how well the endowment performs. Pay relies heavily on bonuses and is positively linked to the CIO's education and professional experience. Large endowments hire CIOs with stronger backgrounds, pay them more and structure pay significantly linked to endowment performance. Even controlling for size, compensation depends on an endowment’s governance and location. The results are consistent with the increased investment skills needed to manage large pools of capital often involving alternative assets, and with differences in labor market and monitoring arrangements across endowments. For large endowments the sensitivity of pay to performance is greater than often reported for mutual fund managers.

Optimal Tactical Asset Allocation – Using Recommender Systems in Portfolio Management

Here we present a novel approach to how the Chief Investment Office (CIO) can select investment strategies to allocate to and to decide the percentage allocation to them. The method that we outline here is a continuation of our previous research on recommender systems science[13]. The aim of this project is to improve upon an objective measure of the CIO’s efficiency. The CIO office is tasked with allocating to the available investment strategies and altering the allocation based on changes in financial markets. The allocation algorithm outlined here tries to adapt to new market regimes while simultaneously responding to observations of the relative performance of investment strategies. It turns out that a solution to the strategy selection problem faced by CIOs is very similar to the science behind movie or music recommendation. The algorithm learns from historical observations about strategies. It tries to figure out a relationship between different dates and months in the past, and between strategies to which we are possibly allocating. This process of detecting a two-dimensional neighborhood is what is superior to methods adopted by CIO offices in the past.

COMMENTARY: Chief Investment Officer (CIO) View of Trader Alpha Frontier (TAF)

Since the introduction of Trader Alpha Frontier, this framework has been adopted by asset managers of all sizes, to monitor their trading performance. The next logical step is for Chief Investment Officers to incorporate Trader Alpha Frontier into their main view of portfolio returns. The author visualizes how CIOs can get a full insight in all alpha sources throughout the investment value chain including Analysts, Portfolio Managers, Traders, and Brokers.

Mitigating the South African retirement-income shortfall crisis

Orientation: National Treasury acknowledges that 90% of all South African retirees will not have adequate financial resources in order to sustain themselves.Research purpose: This study aimed to address the retirement income shortfall by assessing possible changes to prudential retirement fund regulations.Motivation: Asset allocation plays a pivotal role in achieving the required rate of return of any portfolio. However, the restrictions on asset allocation imposed by article 28 of the Pension Funds Act of 1956 limits pension funds’ ability to achieve adequate returns.Research approach: A survey was conducted among chief investment officers (CIO) of the top 25 South African investment management companies.Main findings: The study proposes changes to the Income Tax Act, the Collective Investment Scheme Control Act and Regulation 28 of the Pension Funds Act.Managerial implications: The proposed framework should result in fewer pensioners becoming dependent on the state for their pension and empower pensioners to have greater amounts of post-retirement savings.Contribution: The contribution of this article is the proposed changes to the regulatory framework, which could – ceteris paribus: (1) Enable SA retirement fund investors to contribute to the retirement wealth pool in an unconstrained manner. (2) Enable SA retirement fund assets to increase investment returns by as much as 1.21% per annum. (3) Increase the average SA GRRs from the current projected 10.0% to 10.7% by 2045. (4) Increase the efficacy of the existing tax incentives. (5) Reduce spending requirements for grants in the national budget.

FSMA and Third Party Rights: Victory for FCA in Supreme Court

This article analyses the judgment of the Supreme Court in Financial Conduct Authority (Appellant) v Macris (Respondent) [2017] UKSC 19. The Financial Conduct Authority (FCA) emerged triumphant in this appeal and the outcome has altered the fortunes of persons regulated by the City watchdog. Reversing the Court of Appeal’s judgment, the Supreme Court held by majority that Mr Achilles Macris (M) had not been identified in the Final Notice given to JP Morgan Chase (JPMC). Accordingly, any “third party rights” under section 393 of the Financial Services and Markets Act 2000 (FSMA) were not engaged because the notice did not identify M when interpreted by information readily available in the public domain. Lord Sumption found the analogy with the law of defamation to be unhelpful. Lord Mance said that this was “a difficult case” and Lord Neuberger said it was “difficult to resolve” the meaning of the word “identifies” in section 393(1)(a) despite the provision being a “good example” of Parliament’s enactment of generally lucid statutory language. In 2012, the Synthetic Credit Portfolio (SCP) operated by JPMC had lost $6.2bn because of the rogue “London Whale” trades. Because of the notorious losses the Final Notice entailed a financial penalty or “conduct costs” of £137.6m. Between 2012-2016 the world’s twenty foremost international banks paid a total of £264bn in conduct costs of which JPMC’s share was £33.64bn. As the head of the Chief Investment Office, which managed excess deposits including the portfolio comprising the SCP’s traded credit instruments, M’s functions as JPMC’s employee were “controlled functions” under section 59 of FSMA. The losses were linked to high risk trading tactics, feeble management and failing to react to information alerting JPMC to the SCP’s problems. The appeal, explained Lord Sumption, turned on the meaning of “identifies” and on the meaning of the notice to which that word is being applied. His Lordship judged that “a person is identified in a notice under section 393 if he is identified by name or by a synonym for him, such as his office or job title”. He said that it must be evident from the notice that the synonym could only apply to one person and he must be identifiable from information contained either in the notice or publicly available elsewhere. Lord Sumption explained that it is possible to turn to public information available elsewhere only where it enables the interpretation (as opposed to supplementation) of the notice’s language. The ratio of Macris was subsequently applied by the Court of Appeal in the case of FCA v Grout [2018] EWCA Civ 71 which concerned Julien Grout (G) who was one of four traders in the SCP managed by M. Putting the Supreme Court’s test into action, Longmore, Moylan and Newey LJJ held that the FCA’s notice did not identify G – who was foreign exchange trader – for the purposes section 393 of FSMA. The notice did not identify only one person, as required by the test set out in Macris by the Justices of the Supreme Court.

Measuring Liquidity Premiums for Illiquid Assets

Private assets, such as private equity, venture capital, and real estate, have long been a thorn in the side of asset allocators and chief investment officers. Their lack of liquidity makes it hard to analyze their return stream and to construct a performance attribution. The illiquid nature of these assets often leads to misspecification and estimation of the systematic risk embedded in their returns and the true amount of alpha generated by these managers. <b>TOPICS:</b>Real assets/alternative investments/private equity, manager selection, performance measurement

Takaful Operators’ Corporate Social Performance (CSP): An Industry Perspective

Takaful operators which are part of Islamic financial institutions (IFIs) derive their fundamental principles from shariah . These religious based institutions are expected to fulfill the two important roles in their business operations: commercially profitable and socially responsible. Nevertheless, their societal role is rarely measured and discussed. Therefore, this study appraised the societal role of takaful operators by assessing the components which have been proposed under the corporate social performance (CSP) theme for IFIs. This study has arranged structured interview sessions with the Chief Investment Officers and Heads of Investment of each of the eleven takaful operators in Malaysia. The Delphi-style technique was adopted when developing the interview questions. The questions were developed in the form of a five-point Likert scale, addressing specific issues on CSP of takaful operators. In addition, information on takaful operators’ CSR activities, zakat and tax payment were gathered from the companies’ websites and annual report of takaful operators. The study concludes that takaful operators in Malaysia have achieved their societal role through two channels: CSP programmes financed from companies’ profits and fulfillment of CSP as a result of business-community agenda. This study covers every takaful operator in Malaysia and the results reflect industry opinion.

Insights from a Recruiter

When is the right time to reach out to a recruiter? To get an answer, I talked with Debra Brown, a New York-based recruiter for Russell Reynolds Associates’ asset and wealth management practice. During our discussion this past June, Brown offered career management advice tailored specifically for investment professionals. Based on her experience completing searches for CEOs, chief investment officers (CIOs), portfolio managers, and senior sector analysts, among other positions, she provided the following insights regarding when and how to recruit for seniorand executive-level positions within the finance industry.

JPMorgan Chase London Whale E: Supervisory Oversight

As a diversified financial service provider and the largest United States bank holding company, JPMorgan Chase (JPM) is supervised by multiple regulatory agencies. JPM’s commercial bank subsidiaries hold a national charter and therefore are regulated by the Office of the Comptroller of the Currency (OCC). Since the bank’s Chief Investment Office (CIO) invested the surplus deposits of JPM’s commercial bank units, the OCC was also CIO’s primary regulator. During the critical period from late January through March 2012, when CIO traders undertook the failed derivatives strategy that ultimately cost the bank $6 billion, JPM did not provide the OCC with required monthly reports that included CIO performance data and CIO’s internal reviews of the fair values assigned by traders to their derivative positions. However, OCC supervisors also failed to request the missing data, and thus found themselves surprised by the April 6 news stories unmasking the London Whale.

JPMorgan Chase London Whale C: Risk Limits, Metrics, and Models

Value at Risk (VaR) is one of the most commonly used ways to measure and monitor market risk. At JPMorgan Chase (JPM), very large derivative positions established by Bruno Iksil in the Synthetic Credit Portfolio (SCP) caused the bank’s Chief Investment Office (CIO) to exceed its VaR limit for four days in a row in January 2012. In response, the CIO changed to a new VaR model on January 30, which appeared to immediately reduce VaR by half. However, JPM soon discovered that this new VaR model had not been properly implemented and the bank went back to using the previous model. In addition, Iksil, other SCP staff, and their managers also disregarded several other risk metrics and limits during the first quarter of 2012. However, after JPM’s Chief Investment Officer learned on March 23 that Iksil and the SCP had breached the CIO’s mark-to-market Credit Spread Widening 10% risk limit the day before, she ordered trading of the SCP to be halted immediately.

JPMorgan Chase London Whale Z: Background &amp; Overview

In December 2011, the Chief Executive Officer and Chief Financial Officer of JPMorgan Chase (JPM) instructed the bank’s Chief Investment Office to reduce the size of its Synthetic Credit Portfolio (SCP) during 2012, so that JPM could decrease its Risk-Weighted Assets as the bank prepared to adopt the impending Basel III bank capital regulations. However, the SCP traders were also told to minimize the trading costs incurred to reduce Risk-Weighted Assets, while still maintaining the opportunity to profit from unexpected corporate bankruptcies. In an attempt to balance these competing objectives, head SCP derivatives trader Bruno Iksil suggested in January 2012 that the SCP expand a strategy first implemented in 2011 to buy large volumes of certain credit derivatives, while simultaneously selling large volumes of other credit derivatives. The strategy quickly proved unsuccessful, and JPM’s Chief Investment Officer ordered Iksil and the other SCP traders to halt this strategy on March 23. However, losses continued to mount as the credit derivative positions were unwound, ultimately reaching $6.2 billion by December 2012.

JPMorgan Chase London Whale D: Risk Management Practices

JPMorgan Chase (JPM) prided itself on having the best risk management practices in the financial industry, having survived the 2007-2009 financial crisis in better shape than many competitors. Chief Executive Officer Jamie Dimon often spoke of the bank’s “fortress balance sheet”. A keen focus on risk management is vital to JPM’s longevity, as is the case with all highly leveraged financial institutions. However, the JPM Task Force that investigated the $6 billion 2012 London Whale trading loss concluded that risk management practices at the bank’s Chief Investment Office (CIO), the unit in which the loss occurred, were given less scrutiny by senior management than those of the bank’s client-facing businesses, despite the fact that the Chief Investment Office managed $350 billion in assets, an amount almost double JPM’s total stockholders’ equity at December 31, 2011.

JPMorgan Chase London Whale A: Risky Business

In December 2011, the Chief Executive Officer and Chief Financial Officer of JPMorgan Chase (JPM) instructed the bank’s Chief Investment Office to reduce the size of its Synthetic Credit Portfolio (SCP) during 2012, so that JPM could decrease its Risk-Weighted Assets as the bank prepared to adopt the impending Basel III bank capital regulations. However, the SCP traders were also told to minimize the trading costs incurred to reduce Risk-Weighted Assets, while still maintaining the opportunity to profit from unexpected corporate bankruptcies. In an attempt to balance these competing objectives, head SCP derivatives trader Bruno Iksil suggested in January 2012 that the SCP expand a strategy first implemented in 2011 to buy large volumes of certain credit derivatives, while simultaneously selling large volumes of other credit derivatives. The strategy quickly proved unsuccessful, and JPM’s Chief Investment Officer ordered Iksil and the other SCP traders to halt this strategy on March 23. However, losses continued to mount as the credit derivative positions were unwound, ultimately reaching $6.2 billion by December 2012.