Wednesday, July 6, 2011

Interview: Ms. Sandra A. Urie, Chairman & CEO, Cambridge Associates

Cambridge Associates is a privately held independent consulting firm that provides investment consulting and oversight services to more than 900 clients worldwide. The company strives to help global institutional investors and private clients meet or exceed their investment objectives by offering proactive, unbiased advice grounded in intensive and independent research.
In this interview, Ms. Sandra A. Urie, Cambridge Associates’ Chairman and Chief Executive Officer tells us more.

Could you give us a brief background about your organization?
Cambridge Associates was formed in 1973. The concept for our firm grew out of work done for Harvard University by our two founders, James Bailey and Hunter Lewis, who are still involved in overseeing the firm today.
Over our nearly forty years in business C|A has expanded into a global investment consultancy. Our mission has remained constant: we strive to help institutions and private investors around the world meet or exceed their investment objectives by providing proactive, unbiased advice grounded in intensive and independent research.
Cambridge Associates currently has over 1,000 employees based in London, Singapore, Sydney, Arlington, Boston, Dallas, and Menlo Park, with an office to be opened in Beijing in the summer of 2011. Our professionals are dedicated to serving over 900 clients globally including colleges and universities, charitable foundations, medical institutions, museums, Sovereign Wealth Funds and other government agencies, pension funds and families. Our clients represent aggregate assets of more than US$2.5 trillion.
Our only line of business is investment consulting and its supporting functions (i.e., research and performance measurement). One-hundred percent of our revenues are derived from providing these services to our clients, the owners of the assets we advise.
• Investment Consulting: Consulting is our core business, and we advise clients on a broad range of investment issues such as portfolio strategy and policy, asset allocation, manager selection, and performance evaluation across all asset classes, including alternatives (hedge funds, private equity and private hard assets). In addition, currency hedging has been a key issue in many countries where we have clients, including Korea. We also have significant experience in providing advice on investment operations, corporate governance, risk management, and best practices in institutional investing. These are all topics that should be of interest to Korean institutional investors as they contribute to superior investment returns.
• Research: Our high-quality, independent investment and capital markets research provides the foundation for all client recommendations. We currently have more than 190 research professionals working across four continents, bringing a global perspective to our work. Our research efforts are supported by our proprietary manager database, which currently tracks over 7,000 managers and 22,200 funds across all asset classes and geographical regions. This means our clients have access to a large and global opportunity set when considering implementation strategies for their portfolios.
• Performance Measurement and Reporting: As part of the consulting relationship with our clients, we undertake performance monitoring for both marketable (e.g. public equities, fixed income, hedge funds) and private investments (e.g. private equity, real estate, venture capital, infrastructure, energy, timber). Our reports include investment returns and regular analyses of fund performance. These reports help our clients analyze their performance results, how the results were achieved, and how they compare to customized benchmark statistics.
What is your view on the current investment strategies of Korean pension funds? Should they allocate more resources to Alternatives?
Korean institutions are certainly considering expanding their policy portfolios to include more exposure to alternatives and we would certainly support that move. Depending on the alternative classes included, they can provide the potential for higher returns and also, in the case of edge funds, lower volatility. However, implementation is critical, and requires a rigorous approach to due diligence and manager selection. Few institutions, including some in Korea, have the requisite in-house experience to effectively identify, complete the due diligence on, and gain access to the best alternative asset managers on a global basis. As a result, many investors have had less than positive experiences with hedge funds during the financial crisis and find themselves under-allocated relative to their original plans.
Fear of a potential Madoff repeat looms large and reinforces the need for disciplined and comprehensive due diligence, both before making an investment and on an ongoing basis once the investment is made. The Korean investment community was hit hard by exposure to Madoff. This has caused many investors to step back and examine their investment decision-making process. For many, around the world and not just in Korea, it was a fiduciary wake up call. One of the key oles we play at Cambridge Associates is to protect investors from mistakes by working alongside internal investment professionals to provide rigorous due diligence and a global perspective on manager selection. If Korean pensions want to build out their allocation to hedge funds, they must be prepared to invest in the process of researching, selecting, and monitoring managers.
This issue is also relevant to private investments (i.e., private equity, venture capital, real estate, energy, infrastructure, and timber). Given the significant dispersion of returns among managers and their funds, manager selection and rigorous due diligence are critical. Building a private investment portfolio can significantly enhance returns, but also requires a commitment to building the resources necessary to implement and monitor managers and the patience to build out the program over time to minimize so-called vintage year risk. Based on our observations, many Korean institutional investors are looking at a narrow subset of the universe of available private investment opportunities globally, which will likely limit their ability to generate good risk-adjusted returns.
We have also seen a tendency in Korea to focus on capital preservation in nominal terms. Protecting a portfolio against nominal losses can hide the effect of ongoing inflation and can expose the portfolio to inflation-adjusted capital losses. Such an approach requires an even more vigilant focus on due diligence and manager (or asset) selection. When perceived risk is low (i.e. because of a government guarantee) nominal returns are also generally lower. We like to think in terms of risk-adjusted returns: how much incremental upside could investors receive from an additional unit of risk, and where do asymmetries exist that investors can benefit from?
What are the real estate investment intentions of global investors?
At a very basic level, many people like investing in real estate because it is a “real” asset – something you can see and touch – it typically generates both an income return and a capital return. For people who are skeptical about securitized and less tangible assets, physical real estate can bring a sense of comfort to investors. We see this particularly in Asia. Real estate can also offer investors some inflation protection through exposure to the potential for rising rents and capital appreciation when financial assets are being hurt by inflation. Public and private real estate investments can also provide valuable diversification as well as equity-like returns over the long term. Private real estate offers greater prospects for active managers to exploit opportunities and add value. On the other hand, private real estate is illiquid and more expensive. Public portfolios provide the most immediate source of diversification, whereas private real estate requires time to build. REITs generate cash flow, are liquid, and have lower fees. However, they are subject to the supply, demand, and pricing pressures of the public equity markets. The correlation of REITs to the broad equity markets would likely increase during periods of stress within the market and historically, REITs have been highly correlated to small cap value stocks.
We advise global investors to invest in real estate through a diversified set of public and private fund opportunities and to consider relative value at the time of implementation. The other interesting trend is global investors’ portfolio mix of investments in limited partnership vehicles and direct investments in properties. Large institutional investors have typically first built a portfolio of limited partnership investments, allowing them to build relationships with the fund managers over time. This can then provide a foundation for co-investments alongside these managers, as well as eventually for a portfolio of direct investments, where a sufficient in-house resource with appropriate direct investing experience exists. In the context of a large, diversified portfolio, such direct investments may be appropriate. However, smaller institutional investors might be taking unnecessary risk with direct property investments, sized too large relative to the size of their asset pool. More often, these types of institutions build exposure to real estate through limited partnership vehicles, more appropriate to their size and diversification needs. The risk in Korea is that smaller institutions, in particular those without appropriate in-house investment resources, seek to emulate the leading investors when they do not have the internal resources to implement and replicate those strategies.
Are Asia and Korea an important part of their strategy?
Yes, Asia, including Korea, is definitely considered in the opportunity set in a global portfolio. Many of our North American clients travel regularly to the region and a few have opened up offices in Asia for the very purpose of analyzing Asian investment opportunities. They are gradually increasing their exposure to alternative assets in Asia, while paying close attention to relative value at a time when a great deal of capital is flowing into emerging markets. Investors should be careful to diversify by vintage year, strategy, geographic location, property type, and manager.
What asset classes and markets are favored by global investors?
Right now it is challenging for global investors, as we are not seeing many obvious, attractive opportunities from a valuations perspective. That means we are encouraging our clients to be defensively positioned.
What does that mean?
Within equities, overweight high-quality or mega-cap growth stocks and long/short equity hedge funds. Both strategies may under-perform in a rising market, but they should prove more defensive when market corrections occur. We are also encouraging allocations to managers with flexible mandates who can respond quickly to opportunities that arise in a rapidly shifting landscape. Of course, greater selectivity and ongoing oversight is required when hiring managers with more flexible mandates. These managers should have a depth of experience in the markets they participate in and a proven record of adding value through tactical moves. We continue to be cautious on most Western developed market sovereign bonds in light of weak fundamentals and expensive valuations. Both of these factors suggest that an allocation to sovereign bonds should not be expected to provide as much defense as it has historically, and that it should be supplemented by cash when yields are very low.
In terms of markets, we are recommending that our clients stay neutral on developed market equities. Equity valuations in developed markets are generally not excessive, although U.S. equities are currently overvalued. In emerging markets, while valuations are still somewhat stretched, maintaining exposure and building a strategic overweight are important from our perspective. For those with relatively large allocations to emerging markets, we would consider a more diversified exposure utilizing a multi-asset class approach, incorporating equity, local currency debt, hedge funds, and private investments if appropriate.