Bucking the Norm
by Jennifer Waters
Related Stories: Dream Team
Carnegie Corporation CIO Kim Lew challenges her team to take the contrarian road. Deals are more than just numbers, they’re about the people managing them. And the strategy’s working — remarkably well!
Vartan Gregorian, president of Carnegie Corporation of New York, wrote recently of the importance of underscoring academic freedom as a means of providing “students, scholars, and researchers of all stripes an opportunity to be wildly creative in their journeys, to investigate anything that interests them without being constrained by the marketplace pressures.”
He was writing about the challenges facing us to digest and synthesize the “infoglut” brought upon by this latest surge in the Information Age and, inevitably, the Internet of Things. But he might as well have been speaking of the inner sanctum workings of Carnegie Corporation’s own investment group, the team that Chief Investment Officer Kim Y. Lew is successfully spearheading to manage a diversified investment portfolio and oversight of the Corporation’s endowment.
“The offices of Carnegie’s investment team have become a training ground to learn the investment intricacies of managing a multibillion-dollar portfolio in an unrestricted, supportive, but challenges-welcome environment.”
Call it “Carnegie University.” The term academic freedom, first cited in Constitutio Habita, the University of Bologna’s charter penned in the mid-12th century, “guaranteed the right of a traveling scholar to unhindered passage in the interests of education.”
Translated into “Carnegie University” language, the offices of Carnegie’s investment team have become a training ground to learn the investment intricacies of managing a multibillion-dollar portfolio in an unrestricted, supportive, but challenges-welcome environment. It’s not just limited to those with an affinity toward finance and math either; the team has included a lawyer, an actress, and even an anthropologist.
It’s a good fit with Andrew Carnegie’s original vision in 1911, when he put the last $135 million of his fortune into this philanthropic foundation to promote the advancement and diffusion of knowledge and understanding.
“The investment world is far more than purely a numbers game. It is, at its core, a people business.”
Lew’s narrative for the team she has personally hired and fostered is also spun from her unshakable conviction toward authenticity in the workplace, a penchant toward curious minds and risk-taking, and the fundamental belief that the investment world is far more than purely a numbers game. It is, at its core, a people business.
Lew will be the first to admit that she tends to “mother” her team — but don’t confuse that with “babying.” Think of it as professional nurturing. She pushes them to think outside the traditional foundation and endowment boxes that tend to be restrictive and risk averse. She gives them the freedom to take a topic from a level of pure curiosity to profundity, and dares them to be intrepid in the process.
It’s her own experiences after more than two decades in the world of finance and commerce that guide her. In Lew’s early professional days she received advice that she called “liberating” and that she still lives by as a contrarian investor and manager: Don’t fear failure. Be a maverick and be uncomfortable with the unproven. Take bold chances but think critically, and do the deep and necessary research first. And it’s perfectly acceptable to make some mistakes and take risks as long as you work hard and learn from them — a tenet of “Carnegie University.”
“Following Carnegie’s desire that his foundation continue his ‘beneficial work’ in perpetuity, Gregorian knew he needed to create a top-notch investment team that would be … ‘wildly creative in their journeys.’”
“Risk-taking has to be grounded in a lot of good work, due diligence, and global thinking,” says Lew, who has led the team since 2011, first in a co-CIO role, and since 2016, as the sole CIO. “We set up a structure: that everyone takes ownership of unmasking risk in due diligence, and then we have a rigorous but friendly debate about what’s before us.”
The structure, academic in nature, has shaped Lew’s investment team’s thinking from the get-go. It also has Gregorian’s fingerprints all over it. Before becoming Carnegie Corporation’s president in 1997, Gregorian led a long and impressive career in higher education, including nine years as the president of Brown University, preceded by an eight-year stint at the helm of The New York Public Library. With a PhD from Stanford University, Gregorian spent nearly 40 years in a variety of leadership, teaching, and fellowship positions, as well as serving on a multitude of boards. He has been the recipient of scores of distinguished awards, honors, medals, and honorary degrees, not to mention dozens of accolades for his contributions to education and society, including the prestigious Presidential Medal of Freedom in 2004.
That history could explain why Gregorian chose to shake up typical policy-oriented foundation thinking in favor of a more exploratory, even unique investment route. Andrew Carnegie believed that the rich are merely “trustees” of their wealth and are under a moral obligation to invest it in ways that promote the welfare and happiness of the common man. Following Carnegie’s desire that his foundation continue his “beneficial work” in perpetuity, Gregorian knew he needed to create a top-notch investment team that would be, as quoted above, “wildly creative in their journeys.” And to leverage that creativity of a talented team charged with maximizing risk-adjusted returns, Gregorian changed the governance structure that had been in place since the founding of the Corporation. Third-party managers are now chosen and underwritten by the professional in-house team rather than by the trustees’ Investment Management Committee and their advisors.
“You just can’t make money if you’re doing what everyone else is doing. You have to do something that is different.”
— D. Ellen Shuman, Managing Partner, Edgehill Endowment Partners
“Vartan really understood how important it was to professionalize the investment operation of the foundation,” says D. Ellen Shuman, the Corporation’s former CIO, who now heads Edgehill Endowment Partners, a wealth-management company for small nonprofit organizations.
The two brainstormed on what path they would take and settled, after much deep debate and hard discussion, to take the road (or roads) less traveled. Or, as they say in the investment community, to adopt a contrarian viewpoint. “You just can’t make money if you’re doing what everyone else is doing,” Shuman says. “You have to do something that is different.”
That’s risky for a foundation whose mission and livelihood depend on the returns its investments generate. Remember, Andrew Carnegie expected his foundation to last from 1911 to eternity when he planted that $135 million of restricted net assets in the Corporation. There are no alumni associations feeding that kitty and there has not been one additional dime of endowment since then.
“It’s tough to take a contrarian route when it might have been easier not to do so, or, moreover, when the chips were at their lowest.”
The investment team must have a keen eye to tap on what’s right when everything looks wrong, and to do the painstaking research needed to move the needle from intuition to conviction. Not surprisingly, this “do something different” thinking is not well liked by the powers that be at most foundations and endowments. “Not everything works out perfectly,” Lew allows. “We have to agree that we are long-term investors and we may miss some tactile move in an effort to be long-term and strategic investors.” But again, due diligence is key. “You can’t mitigate risk if you don’t identify risk,” Lew emphasizes.
For its part, Carnegie Corporation has long eschewed the what-have-you-done-for-us-lately investment attitude in favor of a long-term smoothing approach that allows it to adjust its budget to weather short-term volatility. That gives the investment team a level of flexibility not available to every foundation or endowment that judges performance strictly on a quarterly basis.
The Investment Management Committee has been chaired by three giants of the investment industry throughout the last 18 years: Vincent A. Mai, former chairman of AEA Investors, one of the oldest private equity funds in the U.S.; Martin L. Leibowitz, managing director of Morgan Stanley; and most recently, Geoffrey T. Boisi, retired vice chairman of JPMorgan Chase and chairman of Roundtable Investment Partners. Boisi retired from the Carnegie Corporation board and its investment committee at the end of 2017.
“Everyone says they’re willing to be contrarian, but often their risk aversion overcomes them and they shy away.”
— D. Ellen Shuman, Managing Partner, Edgehill Endowment Partners
Shuman credits the leadership of Gregorian and the investment committee; their support, she says, was unwavering — even in the worst of times. And she credits their patience in backing long-term investments that might find peaks and, yes, some uncomfortable valleys in the pursuit of returns that outpace most foundation standards. It’s tough to take a contrarian route when it might have been easier not to do so, or, moreover, when the chips were at their lowest.
“Finding these pockets of opportunity — that’s the fun part of our job, but it requires governance that is supportive of doing things that are very unpopular at the time,” Shuman says. Here’s an example: Investing in subprime mortgages in 2009, amid the aftermath of the global financial crisis, the explosion in the housing market, and the masses running scared. “That was really very challenging for the investment committee,” Shuman says. “When we said we should invest in housing, people were like ‘Are you crazy?’”
It turned out to be among the most lucrative investments Carnegie Corporation has ever undertaken. Its early investing in African stocks in 2000, small-cap Asian stocks, and venture capital and private equity endeavors in India and China, plus a Brazilian investment in 2005, when it was “very out of favor,” ended up working well for the Corporation too.
“As an investment leader on the team, you can be faced with a motley crew of like-minded but testy intellectuals who expect you to explain, in detail, how you dotted every ‘i’ and crossed every ‘t.’”
“Everyone says they’re willing to be contrarian, but often their risk aversion overcomes them and they shy away,” Shuman says. “We were fortunate enough to have an investment committee that knew what we were doing was for the long term and had the patience to wait it out.”
Shuman built her team slowly and deliberately, hiring Meredith Jenkins fresh out of Harvard Business School in 1999, and embarking on this titanic shift in investment thinking whose course Lew now steers. The university model that they carved out and implemented included what one might expect: discovery, research, mentorship, scholarship, application, and integration in a challenging environment. It also includes a huge dose of humility, because as an investment leader on the team, you can be faced with a motley crew of like-minded but testy intellectuals who expect you to explain, in detail, how you dotted every “i” and crossed every “t.”
Lew joined Carnegie in 2007 as a director of investments after more than a decade at the Ford Foundation. Ultimately, it was that triumvirate of women — Shuman, Jenkins, and Lew — that put together and coached the dream team that is now in place. Under Shuman’s tutelage, Carnegie Corporation dramatically stirred the investment portfolio pot, globally and by asset class, to far exceed its policy benchmark. Assets grew to $2.55 billion from $1.5 billion, while the Corporation doled out more than $1 billion in grants advancing world peace, democracy, and education in the U.S., the U.K., and sub-Saharan Africa.
“With some more short-term oriented investors, the discussion when something doesn’t go well is about the symptom, the specific investment that has gone wrong. But Carnegie helps us understand where in our investment process we might have had a breakdown or a failure, which is more thoughtful and long-term oriented thinking.”
— Jan Koerner, Cofounder, Park Presidio Capital
The investment team resets the asset allocation every three years and is due to review it again in 2018. As of June 2017, the portfolio was dispersed as follows: 35.1 percent global equity, 20.2 percent absolute return, 19.2 percent private equity, 15 percent real assets (which includes real estate and natural resources), and 10.5 percent fixed income and cash. The one-year return on the portfolio, again as of June 2017, was 12.1 percent while the three-year return stands at 7.4 percent and the five-year at 10.8 percent.
Shuman left the Corporation in 2011, and the investment leadership post became a shared role, with Jenkins and Lew as co-CIOs carrying the mantle that Shuman created in Gregorian’s vision.
When Jenkins was named CIO of Trinity Wall Street in 2016, Lew became sole CIO at Carnegie Corporation. She and her team — remarkably nimble and lean for the weight of what is now a $3.43 billion portfolio — are doing a lot of heavy lifting. The hours are long and the days jammed with research gathering, model building, minding the bevy of fund managers under their watch, and attending conferences and other professional gatherings. Plus there are the lunches and dinners and extensive travel, both domestically and worldwide.
They have extended “Carnegie University” to partners outside the Corporation through mentoring, offering advice to those still in start-up mode and ideas to those more seasoned. They all have a deep network of business relationships and sources that they share to help their partners succeed too. Just as the team’s successes are tied to each other, so, too, is the success of each partner.
“The Carnegie investment team’s mantra is that they invest in people and they want to know the managers so well that they will have an idea of the decision-making process that might go into righting a wrong and finding new investments before that wrong even happens.”
Ask Lee Hicks and Jan Koerner, cofounders of Park Presidio Capital. When the duo’s hedge fund was still in start-up mode four years ago, they reached out to Carnegie Corporation. It took more than half a year of getting-to-know-you meetings for the Corporation to fully understand the group’s ethos — its uniqueness, goals, personality, and mission — before becoming one of the fund’s first big partners, both financially and as teachers.
“They provided us with insight, suggestions, and guidance that was extremely valuable to us in that first year as first-time business owners,” Hicks says. “They have deep contacts in the industry and they have opened those up whenever we’ve needed them.”
“With some more short-term oriented investors, the discussion when something doesn’t go well is about the symptom, the specific investment that has gone wrong,” Koerner adds. “But Carnegie helps us understand where in our investment process we might have had a breakdown or a failure, which is more thoughtful and long-term oriented thinking.
“They want to make sure that our process works correctly, which allows us to avoid falling into the same pitfalls in the future,” he adds.
“The common wisdom is that asset allocation is the most critical factor in generating strong investment performance. I would argue that manager selection is the most important aspect of managing a global portfolio.”
— D. Ellen Shuman, Managing Partner, Edgehill Endowment Partners
If there’s a collective comment from vendors and outside managers, it is this: The Carnegie investment team’s mantra is that they invest in people and they want to know the managers so well that they will have an idea of the decision-making process that might go into righting a wrong and finding new investments before that wrong even happens. Of course, they’re looking for a sound investment philosophy that can be repeated, but they look for teams that share the same values and global viewpoints as the Corporation does. Again, it’s the people quotient.
“The common wisdom is that asset allocation is the most critical factor in generating strong investment performance,” Shuman says. “I would argue that manager selection is the most important aspect of managing a global portfolio.”
Tomas Ackerman, cofounder of Carnelian Energy Capital, said that when he and his partner, Daniel Goodman, first met up with the Corporation’s team in 2015 about raising funds for their energy investment firm, their goal was to impress upon the team their differentiated strategy for finding companies in which they could optimize the cost structure and be a better operator as investment vehicles.
“The Carnegie investment team looks at this as a people business because at the end of the day, you’re investing in people, not companies.”
— Tomas Ackerman, Cofounder, Carnelian Energy Capital
“We initially wanted a good personal relationship and wanted to make sure there was a connection personally, that we all saw the world in the same way,” he says. “They asked a lot of questions, but what stood out to us is that they really wanted to get to know the people. Lots of their questions were around us, our risk profile, how we think about the partnership, and about how Daniel and I work together — how do we work out disagreements and those sorts of things.
“It was refreshing,” he adds. “The Carnegie investment team looks at this as a people business because at the end of the day, you’re investing in people, not companies.”
And maybe that’s ultimately what Andrew Carnegie himself wanted: to give more than just dollars and cents, envisioning a world in which people of all stripes can “do good” with whatever means they may have.
“Everyone who has but a small surplus above his moderate wants may share this privilege with his richer brothers, and those without surplus can give at least part of their time, which is usually as important as funds, and often more so,” Carnegie wrote in The Gospel of Wealth. He, too, envisioned a people business.
Jennifer Waters is an award-winning writer who has primarily covered business news for major national newspapers and magazines, radio and TV broadcasts, and online. Her work has appeared in the Wall Street Journal, MarketWatch, the New York Times, the Chicago Tribune, and many other domestic and international news publications. She has hosted, cohosted, and produced TV and radio shows on business and general-interest topics for a variety of national broadcast stations, and has been nominated for a James Beard Award in journalism.
