How a Leading Outsourced CIO Firm Selects Investment Managers

For emerging and established investment managers alike cracking the institutional allocator space is no small feat. Institutions tend to be highly sought-after clients due to the large amounts of capital they deploy and the imprimatur bestowed on a manager by a highly reputable institutional client.

TIFF, with offices in Radnor and Boston, is such a client. Having been in business for more than three decades and managing or advising many billions in capital, TIFF is quite unique due to its status as an employee-owned Public Benefit LLC. The firm specializes in Outsourced CIO and private market solutions, assisting endowments, family offices, and other institutions in allocating capital. In fulfilling its mission, TIFF partners with a wide range of investment managers.

We had the pleasure of delving deeper into TIFF’s manager selection criteria in an exclusive conversation with Jay Willoughby, the Chief Investment Officer of TIFF Investment Management and the chair of TIFF’s Investment Committee. Prior to joining the firm in 2015, Jay served as Chief Investment Officer of the $50 billion Alaska Permanent Fund.

The following transcript has been edited for space and clarity.

MOI Global: Please elaborate on your organization’s mission and structure.

Jay Willoughby: TIFF is short for The Investment Fund for Foundations. It was formed in 1991 when a group of larger foundations, including the MacArthur Foundation and the Rockefeller Foundation, decided that smaller non-profits needed a way to pool their capital to become more effective investors. Many of the smaller charities couldn’t afford to hire their own investment staff. So TIFF was created to help point non-profits in the right direction, and we operate as a not-for-profit ourselves.

Our first endowment strategy was launched in 1995. We manage two complete endowment solutions, one offering daily liquidity and the other intermediate liquidity. Additionally, we run hedge fund strategies and private investment strategies. We work for approximately 700 member organizations in 43 states and oversee about $9.5 billion in AUM, including committed capital. All our members are non-profits.

MOI: Tell us about your background and how you became interested in investing. Also, how did you come to be a part of TIFF?

Willoughby: I will tell you what got me started: I was a senior in high school and bought $1,000 worth of a stock in a company called Superior Oil Company of Nevada. A few years later, when I was a sophomore at Pomona College, I sold it for approximately $7,000 and it paid for a full year of college. I said, “Now this is the sort of thing that I want to do for the rest of my life!” After Pomona, I went straight to business school at Columbia, knowing full well what I wanted to do, which was be in the investment business. For the first three years or so after school, I was on sell side of the business and then starting in 1986 – so for 30 years now – I have been on the buy side.

For the first 25 of those 30 years, my job was to actually to pick securities. Over my career, I’ve managed money market funds, government bond funds, corporate bond funds, equity funds, and funds focused on Real Estate Investment Trusts. I have also managed exchange funds – a type of a tax structure – not to be confused with ETFs. I never did private equity, but I managed pretty much all kinds of assets throughout the first 25 years of my career.

In late 2010/early 2011, I was the co-managing partner of a hedge fund when the managing partner decided that his health wasn’t what he wanted it to be – so we shut the hedge fund down and I started managing my own capital. That gets pretty boring pretty fast if you are a value-oriented guy, so another friend of mine said, “Hey, there is this CIO job in Alaska at the Alaska Permanent Fund that you should apply for”. To make a long story short – I did apply, and I got the job, and so in the second half of 2011 my wife and I moved to Juneau, Alaska. I managed the Alaska Permanent Fund, which is the state’s sovereign wealth fund, for four years before moving back to Boston, where we had lived back in the mid-1990s, to join TIFF.

MOI: You’ve called yourself a “value-oriented guy”, is this a Charlie Munger business-quality orientation or a Benjamin Graham asset-focus? Where do you put yourself on the value spectrum?

Willoughby: I put myself on the spectrum somewhere between GARP — growth at a reasonable price — and traditional value. I am not looking for cigar butts that are half-smoked. It is probably more the way that Warren Buffett looks for opportunities today than the way he did perhaps 30 years ago. I am looking for quality businesses where there is a margin of safety.

I also have a contrarian bone in my body. When I was in Alaska our Executive Director said, “Jay likes to run to the fire” — and that is true. I think you find your best investment opportunities where there is the greatest amount of stress. This has been harder as all the central banks have been pumping capital into the system, for the last several years.

During the earlier part of my tenure at Alaska, in 2012, we made the decision to go out and buy single-family homes that were for sale at distressed prices, mostly on the courthouse steps. Wayne Hughes, the founder of Public Storage, was in the process of doing the same thing; we formed a partnership that is today American Homes 4 Rent, which is the largest single-family REIT on the stock exchange. Before their recent sale of shares, Alaska Permanent owned about 20% of the entire REIT. A situation like that, where there is pressure from significant price declines, is what I am attracted to. When I joined TIFF in 2015, we were attracted to energy – we looked and looked and actually found less than we imagined, so we didn’t leap in with very much capital.

MOI: What is your typical workflow? Are you identifying compelling businesses, identifying compelling investment managers, or identifying compelling private deals?

Willoughby: We are a manager of managers; we don’t pick individual stocks, we hire managers. We partner with managers, and what we try to do is partner with the very best managers we can. We are looking for firms where we think the people are really strong. Typically, they may have spun out from another really good manager who, essentially, taught them the business. Typically, our managers have learned the trade for a decade or so. That is kind of ideal.

The single most important quality we seek in a partner is a sustainable competitive advantage. Sometimes these come in the form of better information, sometimes in a different or better way of processing that information, and sometimes in the time frame that a manager brings to the security-selection process. When we uncover a manager that we believe possesses a sustainable advantage, we work hard to try and articulate their edge. As long-term investors, we remain comfortable with a manager who hits a rough patch so long as their edge remains. Often, the outperformance after one of these patches can be very meaningful.

Also, we are very interested in the way managers set up their business. If a manager is trying to do a whole bunch of different things, and gather a whole bunch of assets, we are not interested. Ideal for us is the manager who does one thing very well, wants to do it better than anyone else in the world, and purposefully limits the fund’s AUM. Size is generally the enemy of alpha, and we are interested in alpha.

We want to look at the investments the manager is making – it is one thing to talk about the concepts we like to hear – we want to see it reflected in the investment choices that the manager makes. I like to learn as much as I can about a manager or an organization, form my own opinion of how the manager should relatively perform in various market environments, and then test my own assumptions. If I don’t understand the results, the performance doesn’t fit with what I expect, then I need go back and try to figure out why. The final thing we are looking for is the right fit with TIFF, and this is my primary role: how does the manager fit into the portfolio? If we already have several talented value-oriented global managers, we don’t necessarily need another one. We might replace one, but potentially we are looking for a US-focused manager or a China-focused manager, or something similar.

TIFF has a pretty good track record of picking managers who can add alpha, which is one of the things that attracted me here – in addition to the mission. We have two unbelievable boards, one for our main advisor and one for our mutual funds, which are comprised mostly of CIOs of major institutions. Over the years, they’ve represented such non-profits as Harvard, Yale, Notre Dame, Williams College, the University of Virginia, MIT, Oxford, Columbia, Duke, Michigan, the Metropolitan Museum of Art, the Institute for Advanced Study, the Hewlett Foundation, and other great organizations. They are trying to identify managers and construct their own portfolios. A board member may have already worked with a particular manager we are researching or have previously passed over a manager we are in the process of exploring. Comparing manager notes is always interesting. We think our board members are the best in the business.

Lastly, I would suggest that many of the managers that you meet today who have been really successful in their lives are somewhere in their 50s. In some way or another, many of these talented managers are looking for ways to give back. When and where a manager has an underlying drive to do something good for society – they see us as particularly appealing as a client. That is one of the beauties of TIFF as an organization, with 700 not-for-profit members. Managers can manage capital for non-profits and do a really good job, as they have generally done throughout their careers, and feel like they are giving something back – because they are. They are supporting the missions of every one of these non-profits.

MOI: Invest too early in a manager and one doesn’t know enough, invest too late and one misses the prime opportunity. How do you think through this paradox?

Willoughby: I think that is a really interesting question. When I was in Alaska, our executive director said, “I don’t want you to come to me and tell me you’re going to invest less than $200 million”. We were over $50 billion in AUM, so we had a more limited universe. Here, at TIFF, with $9.5 billion, we are really at an ideal size, in my opinion. We are big enough to be important, small enough to be nimble – we can be both.

I think part of what you look for depends on who you are. We have managers who are brand new; in 2016 we seeded a hedge fund where the founder was spinning out from another firm. The founder had been part of two other really good hedge funds in the past – we liked him and believed he is a money maker. Our due diligence suggested that he was who we thought he was, so we participated in the founder’s round. Similarly, we have set up a unique relationship with an industry veteran on the short side who has an extensive track record of alpha creation. So, one manager has more than 30 years of track record while the other launched only within the year. With the right asset size, we can look at both of these opportunities, and again the question becomes one of portfolio management and fit. We can craft a portfolio in a manner that incorporates the best of both emerging and established managers, and the key for us is that we incorporate differentiated alpha-generating return streams that will also bring diversification to the existing portfolio.

I joined Merrill Lynch Asset Management in the 1990s – and in the early/middle 2000s I was the Head of Research for equity funds. I got to work with a lot of portfolio managers, and everyone behaves differently when a market environment changes. It is also important to understand how a shifting market environment affects a manager, especially new managers, and how it impacts the way they make decisions.

MOI: How do you assess the incentives and alignment of investment managers? Do you apply a checklist? Do you adapt a framework?

Willoughby: It relates to the four elements we explore as we hire managers: business, people, investments, and fit with TIFF. We want to find a business that is focused and not over-proliferated. With regard to personal incentives and alignments, we want to make sure that there isn’t one person who is trying to benefit at the expense of the rest of his or her team. We are really looking for people who are fair, if you will. We are looking for people who aren’t trying to charge the absolute highest dollar that they can to clients, to people like us. Oftentimes, because of our size and who we are, we are able to achieve more attractive fees than whatever the rack rate is.

MOI: Let’s explore the attributes of exceptional managers and how you differentiate great from good. Do you identify excellence by looking for common patterns or is each situation case-by-case?

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