Alternatives, Endowments/Foundations, Institutional Investors, People, Private Equity, Public Funds

IA Strategy: CIO of Saint Paul & Minnesota Foundations Reimagines Investment Structure  

Wei Huang, chief investment officer of the Saint Paul & Minnesota Foundations, knew changes had to be made when 15 months ago he took over the fund from Jack Pohl, who had been CIO for nearly 32 years. The almost 80-year-old foundation, with $1.5 billion in assets under management, was over-diversified and outdated, in Huang’s opinion.

Wei Huang, CIO of the St. Paul & Minnesota Foundations

“Our number-one objective is to preserve our purchasing power, meaning you’ve got to beat your inflation. Historically, inflation has been 2% to 3%, therefore our return target should be 8% instead of 7%,” Huang said. The foundation spends approximately 5% on an annual basis.

Reducing the fund’s investment over-diversification and cutting costs translated directly into cutting managers. The fund has a 50% allocation to liquid public equity, and a 15% allocation to liquid fixed income. Huang has consolidated several underperforming portfolio managers and put some of the proceeds into passive strategies. “We have consolidated a few public equity managers so far, including domestic, international and emerging markets. That trend will continue because we have almost 20 public managers, a lot for a fund of our size,” Huang said. “Everything we’ve been doing for the past 15 months on the new private side is investing in all direct PE funds, direct real estate funds/partnerships, and that’s what we will continue doing for the foreseeable future.” Huang said.

The fund has a 35% allocation to alternative investments. “When I took over, it was all funds-of-funds, including private equity (PE), real assets and hedge funds—we don’t need immediate liquidity to sell in the secondary market, so we’re winding it down naturally,” Huang said. “As a portfolio grows and an internal knowledge base is built, a fund’s alternatives asset class by design should graduate from those early fund-of-funds programs.”

The almost 80-year-old foundation was over-diversified and outdated.

By investing in funds of funds, a foundation gains access to the underlying private fund vehicles, but also pays an additional layer of fees to the fund-of-funds managers, Huang said. “We feel that we have the skill sets and internal management base to do that on our own,” he said. “Typical fund-of-funds managers charge one percent per annum plus the 10% profit carry on top of the PE fee structure—on the illiquid side we’re not doing any funds-of-funds going forward, thereby saving us those fees.”

In 2017, the foundation granted almost $100 million, while the fundraising team raised approximately $80 million. “From a business operations standpoint, that’s almost cash-flow neutral, and our 2018 is going to be similar if not better,” Huang said.

Huang’s team, which is composed of four professionals on staff plus eight volunteers on the foundation’s investment committee, oversees investments for two large entities: the St. Paul Foundation and the Minnesota Community Foundation. Two smaller privately-operated foundations also fall under Huang’s investment-management umbrella, the Bigelow Foundation and the Mardag Foundation.

In early 2018, the Bigelow Foundation opted to dedicate 10% of its assets—close to $165 million—to impact investing. “We’re helping them execute this strategy because the board has a passion in this area,” Huang said. Part of Hilary Wiek’s role as the foundation’s director of investments is to implement an impact investing strategy for that foundation. She joined the investment team this year.

Huang is not currently interested in changing the fund’s asset allocation, which for now remains at 50% public equity, 15% fixed income and the balance divided among asset classes including private equity, private real assets, real estate and hedge funds.

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