Washington University Boosts Returns After Dumping Most Managers

One of last year’s best-performing college endowments attributes its success to a simple move: parting ways with most of its outside money managers.

Washington University in St. Louis gained 9.9% on its $9.6 billion endowment in fiscal 2020, ranking third among more than two dozen colleges tracked by Bloomberg. That’s a turnaround for the Midwestern research school whose fund three years ago was seen as a laggard.

Getting there required an overhaul, said Scott Wilson, the chief investment officer hired in 2017 from Grinnell College in Iowa. He and his team reallocated more than 80% of assets to focus on best ideas. They redeemed from, or are no longer investing with, two-thirds of the managers, which now count around 50.

Washington University Boosts Returns After Dumping Most Managers

“We were certainly aggressive about those changes early on,” Wilson said. “There were structural problems with the portfolio.”

He declined to disclose any names, but tax filings show the university no longer has stakes in funds managed by firms including hedge fund Select Equity Group and early-stage investor Pelion Ventures. New commitments have been made to firms including Eclipse Ventures and frontier-markets specialist Kingsway Capital.

Select Equity declined to comment while Pelion confirmed the exit and said the university missed an opportunity to make eight times its investment. Eclipse and Kingsway confirmed the new investments.

Concentrated Portfolios

Concentration is in vogue among institutions dismayed by mediocre performance from alternative strategies. Having too many managers can mean watered-down returns along with steep fees, but too few can result in less diversification.

“There is definitely a trend toward simplification, having more conviction,” said Margaret Chen, who oversees endowment investing at Cambridge Associates. “But tolerance for risk is easy to underestimate -- it works until it doesn’t.”

Endowments with more than $1 billion had an average of 108 managers in their portfolios in 2019, according to the National Association of College and University Business Officers, which said it only has data for that year.

Wilson, 44, knows volatility from his time at alma mater Grinnell, which hired him as CIO in 2010. The college had one of the best returns in 2014 at 20.4%, then one of the worst the next year at 1%. In 2017 it was again among the leaders.

He and his deputy were brought in at Washington with a mandate to remake the portfolio. In the prior decade, the university had annualized returns of 4.5%, trailing peers such as the University of Notre Dame, which gained 6.7%.

One area where Wilson has narrowed its bets is emerging markets, where the university’s public equity portfolio beat its benchmark by 18 percentage points in fiscal 2020. His work isn’t done.

“We’re still looking for ways to further concentrate our portfolio to our highest-conviction opportunities,” Wilson said.

©2020 Bloomberg L.P.

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