Endowment outsourcing makes GW an outlier, but has savings potential

GW’s decision to outsource its $1.4 billion endowment last week made it one of the richest universities across the country to break up its investment office and hand its nest egg to outside consultants.

The University, which will be the only one among its 14 peer institutions not to have in-house investment managers, follows a swelling wave of universities nationwide that have cut out some of their highest-salaried staff members while expanding the breadth of their investments.

“The outsourcing business is exploding,” Mike Guido, the managing director of the investment firm, the CommonFund, said.

Four years ago, just 1 percent of colleges and universities with endowments of at least $1 billion had outsourced their investment management. That figure is now more than 10 percent, according to data from the National Association of College and University Business Officials.

The University has faced sluggish returns over the last three years, falling behind the more than 11 percent endowment growth at similar universities such as Southern Methodist, Northwestern, Duke and Georgetown.

The public portfolio of GW’s nine-person investment office “struggled to keep pace with strong market rebounds,” according to last year’s endowment report.

“The decision to outsource this function is not a reflection on the investment office or its personnel. We appreciate their service to the university,” spokeswoman Candace Smith said.

Guido, who manages the investments of nonprofits across the country, said transitioning to an outside firm would help tame rising technology and staff costs and put less pressure on the expensive office to see high returns. It will be GW’s first time hiring outside investors in more than two decades.

Lindsey, who has led the investment office since it was created 11 years ago, was the seventh-highest paid administrator at the University in 2012, according to GW’s most recent tax filings. He earned $615,660 in total compensation that year.

GW’s nine-person office also dealt with the departure of three staffers in the past year – a 33 percent turnover rate – that put extra costs on the office to hire and train new investment managers, according to its staff directory listed online.

High turnover is one of the main reasons the University of Colorado Foundation’s four-employee office, which manages the endowment for the whole four-school system, began outsourcing in 2012, Treasurer and Chief Investment Officer Don Eldhart said. It paid a firm called Perella Weinberg Partners $2.1 million in fees to manage its $771 million endowment.

“To train and have them understand the depths of understanding is difficult and time consuming,” Eldhart said. “These firms have the depths and a larger staff than we would need. They could allocate their resources and we don’t have to worry about the turnover.”

Eldhart added that the firm also offered a wider range of specialization, which the foundation’s investment office couldn’t previously afford.

The University has recently hired outside firms to manage its bookstore, dining, package and facility services to save hundreds of thousands of dollars.

A large chunk of the University’s investments lie in real estate, a total of $813 million, according to GW’s annual report. Those properties, which include The Avenue and The Shops at 2000 Penn, are managed by a separate real estate office within the University.

Under former University President Stephen Joel Trachtenberg, the University outsourced its investment management to the CommonFund before deciding to create the investment office in 2003.

He said they decided to create the office because the endowment had reached $1 billion dollars and “we thought we had enough that we could go out and recruit a first rate investment officer.”

“It’s about the money: the money you’re making on your endowment and what it’s costing you in fees and payments to the investment firm. I can only presume that exactly the same calculation was used again,” Trachtenberg said.

Still, there’s no data that proves outsourcing helps returns increase, said Ken Redd, the research and policy analysis director at the National Association of College and University Business Officials.

“It doesn’t seem to make a huge difference with returns,” Redd said. “But it’s not enough of a track record among large endowments. We don’t know what trends might be going forward.”

He added that investment offices can be a point of pride for schools, “but that doesn’t translate to performance.”

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