Institutional Investor's Alpha Magazine - March 2009 - (Page 43) Profile Paul Lawler Diversification with That Some To balance a portfolio skewed heavily toward Frosted Flakes and Rice Krispies, Kellogg Foundation chief investment officer Paul Lawler has built an in-house hedge fund. By Frances Denmark Cereal t’s a bitter-cold January afternoon in Battle Creek, Michigan, and Paul Lawler is glued to his computer monitor, grimly reviewing another day of losses in the U.S. stock market. As vice president and chief investment officer of the W.K. Kellogg Foundation, Lawler, 60, has a lot to worry about. “We’re an institution in the middle of the Midwest, facing a severe economic downturn,” he notes. “Yet companies like Kellogg and institutions like the foundation must continue to do a good job providing the necessities of life to the global community.” Like his counterparts at other foundations, endowments and pension funds, Lawler has seen the value of the assets under his care decline, slowly through the first half of 2008, then straight off a cliff last fall. That’s a sharp contrast to what was happening in August 2007, when the Kellogg portfolio had a record $8.4 billion in assets. The foundation was able to dispense $335 million that year, the largest distribution in its 75-year history. Unfortunately for the needy children and communities who benefit from Kellogg largesse, however, the credit crisis had just begun, and the foundation — which allocates 5 percent of its assets to payouts — began to shrink. At the end of January, it had $6.4 billion, almost 24 percent below its high-water mark. Lawler had long since gone into crisis mode. He was facing an even bigger hurdle than most of his peers, because much of the portfolio he oversees is beyond his control. Lawler must grapple with constraints practically unheard of in modern portfolio theory: About 65 percent of Kellogg Foundation assets are completely undiversified, invested in Kellogg Co. common stock (the foundation owns about 25 percent of the cereal and snack food company). That’s not as bad as the 85 percent figure Lawler faced when he came onboard in 1997, but every investment decision he makes is informed by the fact that cornflakes dominate the portfolio. Perhaps more than most investors, Lawler understands the danger of having all his Eggos in one basket and has taken the 35 percent of assets that aren’t in Kellogg shares and put them in a portfolio filled with hedge funds and other alternatives. At the end of 2007, Lawler could point to a 15.5 percent annualized five-year return on the diversified portion of the portfolio, beating the 12.6 percent performance for endowments and foundations tracked by the Wilshire Trust Universe Comparison Service. Kellogg stock, by comparison, returned 11.6 percent, and the overall portfolio, 13 percent. “He has done a very good job figuring out at the macro level what they want to be invested in,” says Marc Lasry, head of Avenue Capital, a New York–based, distressed-asset MARCH 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 43
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