(January 25, 2012) — “Here’s my glamor shot,” Jim Dunn, the chief investment officer of Wake Forest University’s $1.5 billion endowment, says jokingly about his headshot to accompany his CIO Profile — a weekly snapshot at aiCIO of institutional investing heads globally.
Dunn’s lightheartedness and passion for his work at Wake Forest’s endowment — which achieved 1.77% year-end returns 3% over the benchmark, and 3-year returns of 8.73% — is evident through every phone conversation, email, and in-person exchange we’ve had. In other words, he loves his work and doesn’t take himself too seriously.
For Wake Forest, turbulent market conditions emphasize the importance of the cohesiveness of its investment team — which consists of Dunn along with five investment staff. “Our investment team recognizes that there’s a certain level of hubris born in success. And you can’t underestimate the role of luck,” says Dunn, who came on board to lead Wake Forest’s endowment in July 2009. “I’ll be at Wake Forest for as long as they’ll have me,” he adds.
That excitement and commitment to managing a large pool of assets perhaps says something about the structure of endowments in the United States and the ability for such funds to attract and retain top-tier talent. Unlike their public pension fund counterparts — plagued by bureaucracy, limited resources, and compensation caps — endowments have the flexibility to be early movers in pursuing undiscovered opportunities, translating to outperformance.
“If you look at pure performance over the long-term, endowments have outperformed public and corporate plans. They have less of a need for immediate liquidity, so they can be more flexible,” says Pete Keliuotis, managing director of San Francisco-based consulting firm Strategic Investment Solutions. Meanwhile, an academic paper published earlier this month and co-written by Brad M. Barber and Guojun Wang from the University of California asserts that the average asset allocation of elite institutions and top‐performing funds is the single most important factor to explain stellar returns — with alternatives explaining the superiority of endowment funds.
Dunn cites greater control, options, and tools as the big reasons for his success at Wake Forest. “When I was working at Wilshire managing $50 billion, it just wasn’t as much fun. Managing an endowment is not a spectator sport. Endowments that are inactive are the ones that don’t do well. You don’t want to be complacent with strategies and managers. Within endowments, if you set ambitious goals and hire good people, you can do great things.”
In terms of asset classes the fund is pursuing, Dunn notes that he believes European equities are undervalued. Thus, Wake Forest is dipping its toes into the asset class, looking into frontier markets on the equities side. “We’re worried about the Greece/Euro exit. We won’t be big buyers anytime soon,” Dunn says, “but we see value.”
As of December 31, the fund’s portfolio is 31% equities, with a mere 2.3% of that in the US. Real assets, including commodities, real estate, and agriculture, totals 11%. Absolute return of primality illiquid, non-real assets is 22.3%, with the credit bucket at 35.5%. Unlike many portfolios, Wake Forest’s endowment does not have a hedge fund bucket, with hedge funds instead scattered throughout the different buckets. “When I look at an asset class, I focus on what drives performance,” Dunn asserts, “Hedge funds can fall in a lot of asset classes. Hedge funds are a compensation scheme, not an asset class. What’s in the hedge fund drives where they belong.”
Dunn’s philosophy at Wake Forest is to ‘protect, perform, and provide’, a theme described in aiCIO‘s January 2010 issue. Executing that philosophy, he says, takes talent — a quality that is not solely quantified by annual returns, but also by doing things right and avoiding pitfalls. “The biggest risk to our portfolio is another Bernie Madoff scandal — we would not only lose money, but we would lose confidence in everyone who puts money in our fund. So talent is about how much risk you take,” he says, adding that he is the only CIO he knows who gets paid based on a Sharpe ratio. “Talent comes from not taking big bets. Risk-adjusted returns is the real driver here.”
Dunn’s advice to others within the institutional investing space: Find smart managers to partner with and learn from. Go after deeper, broader relationships. Success comes not from having more managers, but from having the right managers so that you can protect the endowment, perform for the endowment, and provide when necessary.