Why do we see such significant performance differences between the largest non-profit organizations (the multi-billion dollar institutions) and the smaller non-profits (say, under $500 million)? Is it expertise? Asset allocation? Risk tolerance? While all of these are causes of return differences, they are not exclusive to the larger pools of capital. What does tend to be exclusive to these larger pools is access. Most of the large, well-known non-profit organizations have incredible access to the best and brightest money managers. Why is that? There are a few primary reasons:
- Relationships. First and foremost, it helps to know the CEO, Founder, and/or the CIO of the successful funds. Not just meet them in passing, but move in the same social circles they do. These relationships stem from common backgrounds and interests: attendance at an elite high school or top university, playing on the same sports team, living in the same city or vacationing in the same place. It is more than just knowing of each other, it is being friendly outside the 9-5 work relationship, being comfortable in the character of the individual, wanting to support each others’ causes. The fiduciary of the non-profit fund who knows the CIO at the top XYZ firm beyond the work environs has access that the majority of the population does not have.
- Board members: A different type of relationship is built at the board level. Here we see access gained in a variety of ways. First, many successful investment managers are on boards and investment committees of endowments and foundations. While there are frequent restrictions on an endowment/foundation investing in the funds of one of its board members, they get to know each other on one board and can recommend them to another board/IC in which they are members. In addition, through conferences and other industry events attended by board members, peers meet peers, develop relationships with other university board members and other foundation board members and once again, have access to top talent where they might not otherwise. (Yes, there are some smaller foundations and endowments which have elite board membership but it is not as common).
- You can also gain access by being large enough to have the resources to ferret out new best in breed managers; to send team members and consultants to the far reaches of the world to meet with and invest with the best investors in a particular region or sector. If you can’t identify the best investment managers, you aren’t going to be able to access them.
Success certainly isn’t all about access, but it’s a significant start. I am no longer surprised by the number of invitation only events that exist to share ideas and access, nor how frequently I hear stories of long term relationships leading to investing with each other, but it continues to strike me as a significant advantage for larger non-profit investment funds. Some smaller funds have found ways to develop access and it has worked to their advantage, for instance, Russell’s outsourcing clients gain the advantage of access through our deep manager network, but more on that in a future blog post.
Note: One of the nice things about working at Russell is the sabbatical program—a chance to take a prolonged break after each ten years of service. As a result, Bob Collie shall be away from the office until late July. The Fiduciary Matters hot seat will be filled by guest authors over that period.