Institutional Investor's Alpha Magazine - July/August 2008 - (Page 17)

Pension Corner Strategies Mr. Big Goes Small After running a $35 billion pension plan, Peter Gilbert brings the hedge fund gospel to a small endowment. By Katie Gilbert A fter 14 years at the helm of the Pennsylvania State Employees’ Retirement System, Peter Gilbert made the 90-mile move late last summer from Harrisburg to Bethlehem, Pennsylvania, where he is now Lehigh University’s first chief investment ofﬁcer. In some ways the switch from public pension fund to endowment was a shift in the opposite direction. The relatively mature PennSERS — which had $35 billion in assets when Gilbert left but had to contend with employee payouts that outnumbered contributions — had an alternative-investment focus characteristic of endowments. By contrast, Lehigh’s starkly smaller $1.25 billion portfolio, heavy on equities and light on alternatives, more closely resembled a conservatively managed public fund. So it’s hardly surprising that Gilbert, 61, is now using PennSERS as a template to rework Lehigh’s portfolio. “I’m trying to re-create what we did at the state on a much smaller level,” Gilbert says. That means retooling the portfolio toward alternatives, as he did at PennSERS, which had a compounded annual return of 10.8 percent during his tenure and $9 billion in hedge funds, the largest such allocation of any state retirement system. Until Gilbert joined Lehigh on July 30, 2008, its endowment was managed by a nine-member volunteer investment subcommittee of the board of trustees, which had put 65 percent of assets in equities, 20 percent in bonds and 15 percent in alternatives, including 10 percent in hedge funds. The subcommittee did not invest directly in single-manager or multistrategy hedge funds, preferring to use funds of hedge funds instead. Gilbert says that over the next three to ﬁve years, he will increase the alternatives allocation to roughly 55 percent of the portfolio. He plans to put 15 percent in private equity, 10 percent in an inﬂation hedge product, 8 percent in real estate, 7 percent in emerging-markets exposures and 15 percent in hedge funds. “With more meaningful allocations to each of those areas, we’ll create a more diversiﬁed and balanced total portfolio,” he says. Gilbert plans not only to grow Lehigh’s hedge fund portfolio but also to have the endowment begin to decide for itself what funds to invest in rather than leave the decision to fund-of-funds managers. His experience — and his hiring of two directors, one for public markets and one for alternative investments — should help the school reap what he considers the many beneﬁts of direct hedge fund investments (including not paying the extra layer of fees that funds of funds charge). Photo by Theo Anderson for Alpha “I think that with direct investing you can be more speciﬁc in terms of the types of exposures you want and put together a very speciﬁc portfolio that will meet the needs of the university in a diversiﬁed manner,” he says. Gilbert hopes a bigger presence in alternatives will protect Lehigh from sour market conditions like the ones he and his investment team are dealing with now. Still, Lehigh has fared better than much of the ﬁeld. The endowment’s return for the 12 months ended March 31 was 1.3 percent, better than the 0.48 percent return averaged by all foundations and endowments, according to Santa Monica, California–based Wilshire Associates. Lehigh’s three- and ﬁve-year annualized returns were 8.9 percent and 12.6 percent, respectively, compared with the broader averages of 8.40 percent and 12.14 percent. The U.S. economy had just begun to go south at about the time that Gilbert joined Lehigh last summer. Roughly two weeks after he took over, the Federal Reserve Board made its ﬁrst acknowledgment of the weak- Peter Gilbert, former CIO of PennSERS, is reshaping Lehigh University’s endowment. JULY/AUGUST 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 17

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - July/August 2008

Institutional Investor's Alpha Magazine - July/August 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Mr. Big Goes Small The Good Guys: Adopt This School! Interview: Man's Great Hope Cover Story: The Gentleman Activist Strategies: The New Bankers Profile: Staying Alive Research Center: The Best of the East The Asian Sensations Alpha Bytes: Into the Light Unhedged: Commentary: Speculating on Washington

Institutional Investor's Alpha Magazine - July/August 2008

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