Managing a $1.5 billion endowment is not for the faint of heart, particularly during one of the largest market upheavals in recent history. But then John Jenks, Irvine’s treasurer and chief investment officer since 2002, has some experience with outsized challenges.
From 1999 to 2002, John served as chief investment officer for the state of Alaska, guiding a $25 billion investment portfolio that included the state’s public employee and teacher pension funds as well as its general fund. And when he wasn’t managing state assets, he enjoyed braving the notoriously foul weather of the Inland Passage to catch 40-pound salmon.
Since joining Irvine, John has overseen important changes to the Foundation’s investment program. Under his direction, the Foundation has adopted a new, long-term strategic investment plan, significantly diversifying its portfolio and increasing investments in alternative assets.
The Foundation’s investment strategy faced a major test in the 2008 market collapse. Like most large endowments, Irvine experienced a significant drop in assets due to the unprecedented turbulence in global financial markets. Even so, the reduction in the Foundation’s grantmaking was more modest, and its core grantmaking programs were unaffected.
Irvine Quarterly recently talked with John about lessons from the 2008 market downturn and his thoughts about the current global investment environment, as well as more fundamental questions about the Foundation’s long-term investment goals and strategy.
Irvine Quarterly: What are the Foundation’s investment goals and how do they relate to its mission?
John Jenks: Our investment program starts from the understanding that we’re investing to support Irvine’s mission. We’re investing to support our grantmaking programs; we’re investing to effect change. We know we need a certain level of resources to do that, and we need it over a certain period of time.
Our goal is to be able to earn enough to support our programs now and also spend the equivalent in the future. It’s not to have the Foundation get bigger; it’s to support the program spending over time and on a steady basis, and to maintain the long-term purchasing power of the endowment.
Irvine’s board has established a spending rate for the Foundation of 5.5 percent of assets. That figure is not pulled out of a hat; it is the result of our board Investment Committee’s conclusion that we have a reasonable probability of being able to earn 5.5 percent after inflation at an acceptable level of risk. So the investment process is explicitly tied to producing the resources that are available to our programs.
Irvine Quarterly: Can you talk about the Foundation’s investment strategy? How has it changed since you've been at Irvine?
Jenks: When I arrived at the Foundation, we were invested 92 percent in traditional stocks and bonds. So if the stock market went up, that was good. And if the stock market went down, as it did in 2000 to 2002, that was really bad. So it made for a fairly volatile portfolio.
My charge was to smooth out the path, if you will, and to try to execute in a way that would produce slightly higher returns over time. Our strategy has evolved to the point that now we have slightly more than 50 percent of our portfolio invested in a set of investments or strategies commonly referred to as “alternative investments.”
These investments include everything from private equity to private real estate to various strategies best executed in hedge funds. Some of these strategies don't really fit neatly into any description but often present the Foundation with unique opportunities to make outsized returns or to have returns that are essentially uncorrelated with the stock market.
That's really the heart of our strategy: to find highly skilled investment managers who have strategies that are not likely to be correlated with each other. In other words, they don’t all go up at the same time or all go down at the same time. And if you average them all out over time, they produce superior returns with somewhat less volatility than you would get if you just invested 70 percent in stocks and 30 percent in bonds.
Irvine Quarterly: What are the implications for how you manage the Foundation’s investments?
Jenks: There are a number of trade offs embedded in these strategies. Some of these investments are simply going to take a long time, and you may not be able to access them in the interim or only infrequently. So liquidity is a challenge. There's a lot of planning and coordination that needs to go on with the operations at the Foundation to make sure that we have enough liquidity for our grantmaking and our operations.
To execute this strategy, a number of things are really required. First, you have to have a level of expertise at the board level. Our board members need to understand what we're doing and why we're doing it. If you can't meet that test, then this strategy, which is a relatively complicated strategy, is inappropriate. So we worked from day one at attracting some really sharp, investment-savvy people to our board. And we are in the process of adding a couple of outside advisors to the board’s Investment Committee.
Second, we had to have the infrastructure in place: the right custodian bank, auditors who understood our strategy, specialized tax and legal counsel, and so on. And you need the right skills on staff. When I arrived, I was the investment staff. Now we have four people on the investment team, and for the type of program we run, that's the level of resources you have to have.
Irvine Quarterly: How did the strategy work during the market downturn of 2008?
Jenks: It didn’t work as well as we'd hoped, but I think that’s a comment you'd get uniformly from other investment managers. When things really got bad in 2008, there was a period when everything went down. It really didn't matter what was happening fundamentally, that was just the mindset of the marketplace. But I’m still glad we had diversified the portfolio. We certainly had a less volatile experience than we would have had.
Our strategy also provided us with significant flexibility at the bottom of the market to deploy capital in ways that we think will be profitable. I think we planted seeds for future success. It gave us the reach and visibility into a lot of different markets, and now the pieces are in place to be able to execute on some of that stuff, which should pay dividends down the road.
Irvine Quarterly: Can you give an example?
Jenks: We were able to make some very timely investments in China. When everyone sort of backed away a little bit, we had opportunities to deploy in the private equity market, private Chinese companies, and now the Chinese IPO (initial public offering) market is much more vibrant than the U.S. IPO market and we're starting to see some significant returns from that.
Irvine Quarterly: What are the important lessons from the 2008 market downturn?
Jenks: Of all the lessons that were learned by the endowment and foundation investment-management community, there are two that I think stand out.
One is that you need to make sure your investment policy is specifically suited for your institution. This is a competitive business, with a lot of pressure to perform based on objective, external measures. There’s a tendency to try to follow other institutions that are perceived as being particularly smart. But in the end, you have to stay focused on the particular needs of your institution and sculpt your investment program to address those needs.
The other lesson is that liquidity matters. For about a nine-month period, the absolute illiquidity in almost every market caused serious problems for some institutions. Fortunately, we had been fixated on managing our liquidity before the crisis happened, so we had ample liquidity. We never felt constrained in any of our investment decisions, and in fact were able to take advantage of the illiquidity in the market. We will continue to be very focused on liquidity management.
I hope people will remember those two lessons for a long time. If they keep those things clearly in mind, it can position an institution to do well for decades.
Irvine Quarterly: How does the Foundation minimize the effect of investment volatility on its grantmaking?
Jenks: One of our main objectives is to have a relatively smooth, steady spending rate in absolute dollars. We don’t want this “speed up, slow down, speed up” kind of spending from year to year, because it’s quite disruptive to the organizations we support. So we try to smooth out any short-term volatility with a spending formula.
The spending formula uses an average of our assets over the last three years. It’s a little more complicated than that, but effectively that’s what it is. So, in a really great year, we're not trying to spend a huge amount at the end of the year, and in a really bad year, we're not pulling back in a major way. Instead, it's smoothed out and allows us to plan and to budget.
In addition, we have a number of structures in place so that any volatility doesn’t go slamming through our operating budgets and do real harm to our programs. So after the downturn of 2008, our core grantmaking budgets were still protected because of a variety of factors that include how we size our programs and how we allocate the budget.
Irvine Quarterly: How do you view the global investment markets going forward?
Jenks: The world is not a rosy place from an economic growth perspective. Certain parts of the world, like China, are growing quite quickly and are very dynamic, but even some of those economies have concerns. I think there's a reasonable consensus that the developed world, which is the big chunk of the global economy right now, is in for a period of prolonged slower growth.
Slower growth is generally not the environment for superior investment returns. So it is likely that we're in a period that investment returns are going to be good but not great. And that might mean six or seven percent a year, nominally, or four or five percent a year after taking inflation into account.
So we’re spending a lot of time thinking and talking about what kind of return is sustainable. We’ve done this before. I’ve had the privilege of leading this institution through this process three times in the past. We’re trying to learn from a lot of other people and institutions that we respect and then run it through our unique Irvine lens.
Irvine Quarterly: How does the Irvine board get involved in this process and in general with the Foundation’s investment policies?
Jenks: As the fiduciaries for the Irvine Foundation, the board is ultimately responsible for the prudent stewardship of our resources. I work closely with the board’s Investment Committee, which reports regularly to the full board.
As a whole, our board plays an invaluable role. We have people on it who are, shall I say, well-informed skeptics, friendly skeptics. And I can’t overstate how important that is, because it’s easy to fall in love with your own ideas – and that almost never works out well.
You need people who are versed enough in the markets to know when being a skeptic is helpful. And we’re blessed with having some folks who are very accomplished within investment circles and can ask the right questions.
Irvine Quarterly: Does the Foundation engage in socially targeted investing or apply any social screens to its investments?
Jenks: We have chosen not to constrain our investments because we believe we can have the greatest impact through our programs and by investing for maximum returns. At the end of the day, we want to maximize the resources that are available to our programs, where we have talented staff that have the knowledge and experience about how best to deploy those resources for greatest impact.
We know there are differing opinions on this question and respect the variety of approaches used by our colleagues. If we were a single-purpose foundation, say in the health care field or the environment, then we might have a different answer with regard to specific investments in those areas. But we are a multipurpose foundation and we believe the best approach is to maximize the impact we can have through our programs.
Irvine Quarterly: What do you enjoy about your job?
Jenks: Working in the investment business allows you to interact with a wide variety of intelligent, knowledgeable people. The same is true for my colleagues at Irvine, who come from a range of experience and bring a positive attitude to their work. Being able to interact with such interesting folks makes it easy to get up and come to work in the morning.
It’s also nice to reflect on our larger mission at the Foundation. I like to think at the end of the day that maybe I’ve made a little bit of a difference, that because we worked hard at the Foundation, there’s a potential for California to be a better place.