Asset Allocation, Asset Managers, Asset Servicing, Consultants, Endowments/Foundations, Institutional Investors, Performance Measurement, Private Equity

IA Strategy: Eastern Illinois University Foundation Stays Faithful to Active Management

This week, IA spoke with Jim Schnorf, one of seven investment professionals and two ex-officio members who make up the investment committee of the Eastern Illinois University Foundation (the Foundation), about the trend towards endowments and foundations making larger equity allocations in their portfolios, the value of hiring an active manager, and the Foundation’s considerable allocation to international markets on the public side.

The public university’s foundation, located in Charleston, Illinois, has approximately $100 million in assets under management (AUM) and aims to spend four to five percent of that each year on student scholarships and faculty research grants.

Jim Schnorf, member of the investment committee of the EIU Foundation

The EIU Foundation is a separate legal entity. Within the foundation’s structure, an endowment represents the largest asset component, at least 80%-90% or so of the total Foundation assets—this figure can vary from time to time, Schnorf noted. EIU has separate ‘buckets’ distinct from the endowment, including specific trusts and asset pools that are administered independently. The foundation structures its investments to generate returns modestly higher than seven percent, Schnorf said.

The EIU Foundation allocates approximately 44% of its portfolio to alternatives, which includes private equity (PE), and in excess of 40% of its portfolio to public shares. The public equities portfolio is split almost evenly between domestic and international investments, and the PE portfolio is all invested domestically. “Private equity has been a favorable asset class for us [this year],” Schnorf said. The Foundation Board plans to announce its annual returns at its annual meeting on homecoming weekend, October 19-20.

Despite international public equity valuations that trail U.S. public equities, Schnorf finds U.S. equities attractive. “Some might say that U.S. public companies are priced very high relative to historic norms, but the corporate tax cut from 35% to 21% provided some justification for that,” he said. “I have traveled most weeks continuously for many years, and I would characterize the current business environment as the most broadly optimistic I’ve ever seen,” Schnorf stated. “As a function of the broad business deregulation initiatives from the Trump administration, resulting in less burdensome requirements to companies in areas such as EPA, OSHA, labor regulations, there is a general motivation to commit to business expansion.”

Emerging markets are also on Schnorf’s radar. “In emerging markets, we currently invest in public equities, via managers or a fund-of-funds approach, most typically across a swath of countries versus targeting a specific geography,” Schnorf said. “The investments are across diverse sectors.”

The EIU Foundation doesn’t shy away from high-performing active managers on the basis of high fees. “Good performing active managers generate superior returns on a net-of-fees basis. But we absolutely replace managers that are not performing on a net-of-fees basis,” Schnorf said. “We worry more about having too few managers than too many,” he added. “We are willing to pay fair fees to top managers—we’re not going to be dazzled by a manager that tries to sell us only on the basis of ultra-low fees.”

The EIU Foundation emphasizes transparent reporting, with detailed analyses of investments presented to the investment committee every quarter by its consultant, FEG Investment Advisors, which recently replaced Mercer. “We had worked with Hammond Associates out of St. Louis for a long time, and Dennis Hammond made the decision to sell his firm to Mercer some years ago. After extending the agreement with Mercer for a period of time, it made sense for us to issue an RFP,” Schnorf said. “We targeted approximately one dozen consultants in the RFP search, with one limiting requirement being that the consultant needed to have a full-service office within reasonable proximity of EIU—an approximate radius of 250 miles. This limited the number of potential respondents. Mercer was invited to submit an RFP, which they did, and they were one of three finalists along with Marquette Associates and FEG,” he added. “Mercer was extremely cooperative in the transition.”

Unlike private universities, EIU does not depend on the endowment’s return to help fund operations, Schnorf said. “The university’s budget primarily comes from state funds and tuition,” he added. “We go to great lengths to avoid eroding the principal amount of endowment’s core assets,” he said.

Like Schnorf, most of the seven members of the Foundation’s investment committee are alumni of the university and have a deep personal investment in the community, he said.

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