Handover of University’s $1.4 billion investment portfolio pushed to this fall

Updated: July 3, 2014 at 1:28 p.m.

The University will take at least another four months to find an outside company to manage its $1.4 billion endowment, prolonging the breakup of GW’s investment office.

The delay comes after University spokeswoman Candace Smith had said GW would cut seven positions and transition a firm in time for the start of the new fiscal year, which starts Tuesday. Smith said the University will begin asking companies to pitch themselves to officials within the next “several weeks,” and make a decision by late October.

“The bottom line is it is going to take as long as it takes, and we don’t anticipate the timing will have an impact,” Smith said. “We are doing our due diligence, and the office is being managed until a firm is selected.”

Universities often take their time choosing an outsourcing firm to ensure they protect their financial reputations, said Ken Redd, the director of research and policy analysis at the National Association of College and University Business Officers.

“The penalty of being wrong is the financial penalty of break-up fees and then the emotional cost of doing another request for proposal and having to devote more staff time,” Redd said.

GW’s move, announced in March, makes the University one of the richest schools to take apart its investment office and the only among its 14 peer institutions. The University has also recently hired outside firms to handle services like internal auditing, food service, mail service and facilities upkeep.

Investments grew by 9 percent overall last year, falling behind many competitor schools. The bulk of returns came from GW’s large real estate portfolio, which the investment office does not control.

Executive Vice President and Treasurer Lou Katz said Donald Lindsey, the University’s chief investment officer who has 26 years of experience managing endowments, will continue to work in the investment office until GW chooses a firm.

“We value his leadership, and his knowledge of the investment industry will help to ensure a smooth transition,” Katz said.

Lindsey said the University has long considered outsourcing, which means it will join a wave of schools that have decided to hand its nest egg to an outside company.

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

“I am committed to ensuring that we identify a firm that will be the best fit for the University’s long-term future,” Lindsey said.

Alice Handy, founder of the firm Investure, said she wouldn’t be surprised if GW’s search extended beyond October.

“You’re picking an office and a chief investment officer, and those things take a long time to get right,” said Handy, also the former chief investment officer at the University of Virginia.

She said Investure, which manages endowment portfolios at Trinity University, the University of Tulsa and Middlebury, Barnard, Dickinson and Smith colleges, has not been approached by GW.

Though outsourcing sometimes takes up to a year to complete, the wait can pay off, Handy said. Schools that outsource often see benefits like less staff turnover and more stability – important features for a group overseeing an institution’s financial foundation.

GW’s investment office faced scrutiny over the last year after its former director of operations and risk claimed she was fired for blowing the whistle on flawed financial reporting that she had seen in the office.

The office also had a 33 percent turnover rate in the last year, which put strains on the office to hire and train new investment managers.

“With an endowment the size of GW’s, there’s the thought that if you have a good CIO, they may leave for a bigger opportunity,” Handy said. “Now you’ll have a stable group that can manage it.”

Keith Baum, the managing director of the foundations and endowments group at the Minneapolis-based outsourcing firm Abbot Downing, said the launch of GW’s $1 billion fundraising campaign could have slowed the search for a firm.

“A $1 billion campaign and making sure it’s on the right track and choosing an investment manager are two very large tasks. Those two things together are a lot of work,” he said.

Before creating its investment office 11 years ago, GW outsourced to management firm CommonFund, which did not return repeated requests for comment. Financial services firm TIAA-CREF declined to comment about whether it had been contacted by the University, though it is a service provider for GW’s defined contribution retirement plan.

This post was updated to reflect the following correction:
The Hatchet incorrectly reported that TIAA-CREF managed part of GW’s endowment. The firm is actually a service provider for the University’s defined contribution retirement plan. We regret this error.

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