“Foundations” is an occasional series of informal question-and-answer sessions with employees and others affiliated with The William and Flora Hewlett Foundation to give them an opportunity to explain their work.
Ana Marshall is the director of public investments and deputy chief investment officer for the Hewlett Foundation’s endowment. With twenty-two years of investment experience, Marshall is responsible for asset allocation and strategic investment policies for the $6-billion-plus portfolio, including selection and oversight of external managers in global equities, fixed income, currencies, and derivatives, among other investments.
Before joining the Foundation, she was a senior portfolio manager at RCM Capital Management. Earlier in her career, she worked as an analyst and portfolio manager of emerging market debt and equity portfolios at Bank of America. Marshall graduated magna cum laude in economics from the University of San Diego in 1987 and earned her Chartered Financial Analyst designation in 1989. She serves on the Skoll Foundation and the Skoll Fund investment committees.
What does your day-to-day work entail as a manager of Hewlett’s endowment?
First, I’d like to point out that we don’t manage the investment portfolio ourselves. We engage outside money managers to make individual investment decisions. A large part of our job is selecting and working with these managers of our public equities, fixed income, and derivative investments.
Some managers invest just in U.S. stocks, some in international stocks, some in global stocks of individual countries, and some in emerging market stocks or emerging market debt. Those are some of the major categories. At any given time, we’re managing slightly more than twenty of these public asset managers. We also have a hedge fund that we co-manage with an external manager. There are another seventeen to twenty outside managers for that.
We regularly visit or call—and we’re always talking to—these outside money managers because we really view our work as a partnership. They’re our eyes and ears on the ground, monitoring the best current thinking in the various markets. These are very seasoned people; we rarely go with a manager whom we haven’t known for years. It’s about personal integrity: a manager may say, “You know, I don’t think you should be in X investment right now,” even if it means taking money away from him. At the end of the day, we look at the quality of these relationships more than anything else.
We either have our portfolio actively managed by people like this, who look at the fundamental values of stocks, or we’re invested in various indexes. The same thing is true in our fixed income investments, the bond portfolios.
One key part of our job is monitoring to be sure we always have enough liquidity among our investments overall to be able to pay our grantees and the Foundation’s operating expenses.
What do you do when there’s a big downturn in the market, like the current one?
We breathe. We have to keep our heads about us and have discipline. If you get emotional in the markets, you lose. For example, we have set levels where we sell a certain amount of equities.
That said, we don’t have the flexibility that an individual investor would have to pick good investments and simply hold them through a downturn. In addition to being able to pay that average 5 percent payout to grantees, we have to be able to raise another 5 or 6 percent to pay money we’ve committed to private investment partnerships when they request it to invest on the Foundation’s behalf.
How is managing assets different in a down market than an up market?
When the assets were growing, we looked very carefully at what we were adding and why. You have to apply the same level of discipline in a downturn. If you deconstruct it the wrong way, you can damage the future returns of the portfolio.
When we started getting pessimistic last summer, we reduced our leverage, and we sold equities. Could we have sold more? Sure. But you need to be measured. You don’t want to make drastic moves because you could always be wrong.
So we’re in a good defensive posture, but over the next five years we’ll grow more slowly. In a world where equities return 8 percent a year, having 30 percent versus 36 percent of our investment in equities means the portfolio will not be able to participate as much in a strong equity rally.
But if you try to eliminate all risk—get rid of all equities and have all fixed assets like bonds and our private investments—then you can never recover. So it’s a balancing act.
How much slower do you project the foundation’s assets will grow as a result of more defensive investing?
If we take our current assumptions and use our new proposed asset allocations, we project a return of around 9 percent. It’s not a lot smaller than in the past, but there were some years with remarkable returns. Over the past nine years, the return was 13.9 percent.
How long until the economy really turns around?
Maybe 2011. The credit markets are starting to unfreeze, and every day that goes by moves us away from the abyss. But it’s still too soon to say a recovery has begun. Unemployment is still increasing. The economy needs to be growing at a minimum of 2 percent annually to prevent unemployment from going up, and we’re not there yet.
And the worry is that the administration’s policies have not necessarily solved the problems: they’ve just put the patient on life support. The Federal Reserve Board has put lots of money into the economy to prop it up, but at some point they’ll need to pull it back in. If they do it too soon, the economy could collapse again; but if they do it too late, that could lead to inflation. It’s very hard to get just right.
How is it different to invest for a foundation than for a for-profit investment firm?
In some ways, it’s harder than when I was managing an $8 billion equity portfolio. Because then, if I met my targets but lost money, I knew I was just a part of my investor’s pot of money; some other part made money. At the Foundation, it’s all about absolutes. How much we make decides how much good work we can do. The moral responsibility is different.
If I had been an institutional money manager during the recent downturn, I probably wouldn’t have reduced the risk quite so much. I would have reasoned, “Well, they’ve lost the money; we have to get it back.” I can’t work that way here. Here we want to preserve the grantmaking ability of this foundation in perpetuity.
Are there investments Hewlett won’t make that you might have in the for-profit world?
The only formal restriction we have is on investing in tobacco. But informally, we’re aware that the Foundation has a public profile, and we don’t want to make investments that would hurt that. It’s not policy, but there’s a social consciousness at work that is part of our thinking as we consider investments. That’s one reason we try to stay aware of what Hewlett’s grantmaking programs are doing.
Do you have any advice for grantees in the current difficult economy?
I would say be prudent. Keep costs under control. This isn’t “off to the races and the problems are behind us.” This is a very tenuous recovery, and we believe that we’ll probably need another government fiscal stimulus package in 2010.
One ripple effect of the economic trouble is that corporate philanthropy is now viewed as a luxury. So some grantees may be looking at still more cuts. Every endowment is down an average of 20 percent.