Like anyone with a nest egg to protect, N.C. Central University’s trustees and chancellor are wondering how long Wall Street’s bull market can continue to run.
And they’re worried enough about the potential answer that, on a consultant’s advice, they appear likely to shuffle the university’ $34.1 million endowment to put more money with a UNC-linked investment manager that by its own admission “tends to play defense better than offense.”
The go-ahead is a few days away because trustees Chairman George Hamilton and Chancellor Johnson Akinleye want to first confer with the other, minority-owned investment firm NCCU deals with, Piedmont Investment Advisors, that stands to see its share of Central’s business decline.
“They’ve been a great partner, and we want them to continue to be a great partner,” Hamilton said. “I don’t want them to be surprised by the changes we’re making.”
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N.C. Central now lets Piedmont manage 32 percent of its money. The remaining 68 percent is with the UNC Management Co. Inc., the organization that runs endowment investments for UNC-Chapel Hill and several other UNC system campuses.
The two managers pursue vastly different strategies, with Piedmont focused on trading only traditional, large-capital, blue-chip U.S. stocks like Apple Inc. UNC Management puts money into a much wider range of investments, both in the U.S. and abroad. Along with stocks and bonds, it’s willing to trade stakes in real estate, private equity and hedge funds.
As it happens, Piedmont’s strategy has paid off for NCCU in the long, post-recession run-up of U.S. stock prices, said Sara Morgan, senior consultant for Asset Strategy Consultants, the Baltimore firm Akinleye’s staff hired to help it evaluate the university investment strategy.
Over the past seven years NCCU’s averaged about a 10 percent return on its money, Morgan said.
“You’ve been smart to let Piedmont run,” she said of the Durham-based firm, which manages about $6.1 billion for its clients. “It’s been the place to be.”
But the problem is that no bull market lasts forever, and it’s likely that UNC Management’s broader portfolio will better cushion any of the bumps that accompany this one’s end, she said, singling out real estate and private equity as investment types that should hold their value.
Regardless, “we think it’s going to be hard to generate 8 percent [a year] over the next five to 10 years,” Morgan said. “We just feel like the next 10 years won’t be as generous.”
Eight percent’s an important benchmark for NCCU because its finance staff counts on being able to channel the equivalent of 5.5 percent of endowment returns each year to subsidize campus operations. Planners also reckon on needing the endowment to cover inflation and management fees.
Morgan recommended that NCCU place 75 percent of its money with UNC Management, and leave the rest with Piedmont. That would mean moving about $2.5 million from Piedmont to UNC Management, Vice Chancellor of Administration and Finance Ben Durant said.
Under questioning from trustees, though, Morgan conceded that she thinks an 80/20 split in favor of UNC Management would be even better. That would translate into moving about $4 million, Durant said.
Trustees initially appeared likely on Tuesday to green-light the 80/20 split. But they deferred to Hamilton’s request for a delay. And new trustee John Herrera, a co-founder of the Durham-based Latino Community Credit Union, said he’d been “really happy to hear” that NCCU has relied on a minority-owned firm like Piedmont with so much success.
He asked whether it would be possible to hold off and change investment strategy only “when things begin to go south.”
Durant counseled strongly against that idea.
“We’ve all heard you can’t time the market, right?” he said.
“What our consultant is recommending is that we take a proactive approach to deal with what we know is coming,” he continued. “We’ve had an eight-year bull market. It’s going to turn into a bear market eventually. Who knows how much legs the economy still has?”
“When? That’s the question.” Akinleye asked.
“Now,” Durant answered.
Piedmont and UNC Management started 2017 with differing assessments of what the future might hold.
In February, Piedmont’s fixed-income portfolio manager, Charles Curry, told trustees stocks had “gone off to the races” because of the 2016 presidential election and that the passage of a major federal tax-law rewrite could “launch the animal spirits” that would fuel continued market increases.
UNC Management’s chief, Jon King, by contrast said that while he didn’t see anything that would trigger a recession in 2017, he and his people had “pulled some of the riskier bets out of our portfolio” and were keeping more cash around.
“It feels like there’s something else that’s going to happen, we just don’t know what or when,” King said during his February report.
Both UNC Management and Duke University’s in-house investment manager recorded losses in fiscal 2015-16. The UNC result prompted grumbling at the time from NCCU trustees.
But in fiscal 2016-17, UNC Management bounced back, netting a 12.1 percent return that nonetheless lagged well behind the Standard & Poors 500 index.