Institutional Investor's Alpha Magazine - March 2009 - (Page 44) Paul Lawler Congress forced them to begin diversifying in 1985. The arrangement between foundation and company, however, is seen as mutually beneficial: Kellogg is supposed to be a safe consumer stock, and it often performs better than the overall U.S. stock market during economic declines. In turn, the foundation’s control of such a big chunk of the company means that Kellogg has a friendly owner insulating it from hostile takeover. “Kellogg wanted to be sure that it would be tough for an outside investor to acquire the company,” explains William Richardson, president and CEO of the foundation from 1995 to 2005. The perception of safety can be illusory, as the foundation discovered in the late 1990s, when increased competition and ineffective management sent Kellogg’s stock tumbling from a split-adjusted $50 in 1997 to $20 in 2000. The foundation, as a consequence, shriveled, to $4.85 billion in assets that year from $7.5 billion in 1997. This dismal period is what spurred Lawler to redesign the portfolio. With two thirds of his holdings in one stock, Lawler must take pains to ensure that the remaining third is noncorrelated. He had already begun hiring what is now a bullpen of more than 50 external managers, 17 of whom run hedge funds, and had increased the allocation to alternatives — hedge funds, venture capital, private equity, natural resources and real estate. By 2003 he had thrown out the textbook investment models and designed a flexible compilation of assets that allowed his team to easily move the dials on 30 percent of the diversified portfolio. “We’re inherently an absolutereturn investor — a hedge fund,” explains investment director Bill Ziomek, who helped design the strategy as a Bank of New York consultant to the foundation before Lawler hired him in February 2008. (Ziomek is part of a four-member management team that includes Lawler.) Unlike public or corporate pension funds, which can turn to taxpayers or the corporate treasury, and unlike college endowments — which raise money from alumni and other donors — the Kellogg Foundation is selfgenerating. “The pressure to grow performance is enormous,” says Lawler. But the means to do so are limited because of the heavy tilt toward Kellogg stock, and change is not likely because the foundation’s ties to the company are so strong (the trust that oversees all assets includes Kellogg Co. chairman James Jenness). “In every meeting of the trustees, there is a resolution and a vote to reaffirm the holding of Kellogg stock,” explains Sterling Speirn, the foundation’s president and CEO. “It’s not a debate; it’s much more a ritual.” Sterling Speirn, president and CEO of the Kellogg Foundation, says there is little incentive to sell Kellogg stock. hedge fund hired by Kellogg in 2006. Lasry says Lawler foresaw the current economic turmoil: “In 2006 and 2007, Lawler’s point of view was that things were going to get worse.” Foundations that fail to diversify often come to regret it (see box). An example that illustrates the point is a classic. In July 2000, Hewlett-Packard Co., a computer hardware manufacturer, was on a roll, caught up in the high-technology euphoria of the time. H-P shares hit their historical high of $67 that month before beginning a long, painful descent to $11 in October 2002 as the tech sector collapsed. Shareholders and employees were the most obvious victims of the evaporating equity, but there was also huge collateral damage to children, scholarship programs, conservation initiatives and the Monterey Bay Aquarium. That was because the David and Lucile Packard Foundation’s once–$18 billion portfolio was invested solely in H-P stock. The foundation’s endowment lost more than 80 percent of its value, programs were slashed, and more than half of the 185 employees were let go (the foundation has since diversified). The Kellogg Foundation isn’t as shackled as was the Packard Foundation, whose benefactors insisted the charity hang on to all those H-P shares. Will Kellogg, who created the foundation 28 years after starting his namesake company, gave trustees carte blanche to run things however they saw fit. Nonetheless, trustees kept 100 percent of foundation assets in Kellogg stock until an act of P aul Lawler was the third son in a family of six boys raised in Woodbridge, Connecticut, where his mother managed the household and his father was an executive at tire manufacturer Uniroyal. Lawler attended Yale University, competing on the swim team and graduating with a BA in architecture and political science in 1970. Late in his tenure at Yale, he took a sharp turn 44 • INSTITUTIONAL INVESTOR’S ALPHA • MARCH 2009
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