Carnegie Reporter, Vol. 3, No. 4 | Serving the Legacy of Andrew Carnegie: Investing for the Long Term, page 3

The Corporation’s reputation is often a plus in winning access to the most promising investments. Boisi says the Corporation’s prominence and the respect accorded its investment team are important for access, given that “you’re competing for investable space with the Harvards and Yales, which have several times the capital and which professionalized their investment function decades earlier.”

Unlike Harvard and Yale which have been investing their endowments for several hundred years, Carnegie Corporation of New York was founded in 1911. Within two years of its establishment, Andrew Carnegie supplied the Corporation with an endowment of $125 million. Of this, $100 million was in the form of 50-year U.S. Steel bonds paying 5 percent interest, and the rest in various other high-grade bonds. A decade later, in sorting out his estate, Carnegie’s executor delivered an additional $10.3 million.

Carnegie himself was very clear about his wish to see the money with which he endowed the foundation reinvested, in perpetuity, to serve the public. In the November 10, 1911 letter of gift to Carnegie Corporation of New York—using the abbreviated spelling he sometimes favored—he wrote, “My desire is that the work which I [hav] been carrying on, or similar beneficial work, shall continue during this and future generations.”

But by 1920 the Corporation had lost half its purchasing power to post-World War I inflation, which was almost 100 percent from 1914-1920. Then as now, inflation is anathema to bondholders. “For the first fifteen years of the Corporation’s existence,” writes C. Herbert Lee, who in the 1940s was Treasurer and Investment Officer, “the investment problem was quite simple. Income ran around $5.5 million annually until the legacy was received in 1923 and 1924, and around $6 million thereafter. The securities held—largely United States Steel and other long-term, high-grade bonds—required few changes, and income was received regularly.”

The Corporation’s Finance Committee, Lee observed, did not hold its first meeting until 1923: “While its concern was largely with routine transactions in these early years, it is worth noting that in 1926 and again in 1928 it recorded a decision not to buy common stocks.” In 1928 and 1929 the Trustees sold the Corporation’s steel bonds and invested the proceeds “in a diversified list of high-grade bonds and preferred stocks,” the latter a bond-like type of stock that pays fixed dividends and has a higher claim on a company’s assets than conventional shares.

After the crash of 1929, the Trustees’ reticence about common stocks looked prescient. In fiscal 1933, for the first time, the Trustees authorized the purchase of common stocks, and by the end of fiscal 1936 the Corporation’s stock holdings reached $25 million. Around the same time, the Corporation unloaded its railroad and utility bonds and preferred shares in favor of Treasury bonds.

The Corporation managed to avoid the massive losses suffered by many other investors in the stock market crash of 1929 and the subsequent Depression, but was less fortunate during the early 1970s. During fiscal 1974, a period that spanned the dramatic bust of the Nifty Fifty stocks during the end of 1973 and the first three quarters of 1974, the Corporation lost a whopping 40 percent of its assets, and while the portfolio bounced back to gain 86 percent in the decade ending September 1983 (including the 1974 loss), inflation during this period was 132 percent, which seriously impinged the Corporation’s purchasing power. Fortunately, the bull market that has more or less prevailed since 1979—and the Corporation’s embrace of equities as an appropriate investment vehicle—turned these losses around.

The Corporation’s gains as well as its earlier losses are largely the result of its embrace of riskier investments, in this case equities, as its primary investment vehicle. Indeed, the history of the Corporation’s investing has been one of increasing comfort with risk balanced by increasing diversification. Looking at the portfolio decade by decade, fixed income investments fell as a proportion of the total in every decade right up until 1980. By 1990 bonds were up again, but in recent years the allocation has stabilized to approximately 10 percent of the total. See Chart 4.

Today Carnegie Corporation has an investment staff of five headed by Shuman, who obtained a management degree from Yale before going to work helping manage the university’s money. Working with her to ride herd over the Corporation’s funds are:

Meredith Jenkins, Deputy Chief Investment Officer and director of private equity. She oversees both venture capital and leveraged buyouts.

Niles Bryant, who is responsible for real estate and other real assets such as energy and commodities.

Alexis Palmer, who handles global and emerging markets equities.

Li Tan, who manages absolute return and fixed income strategies.

In addition, Executive Assistant Ariane Leung keeps the team running smoothly.

Shuman and her staff do not make direct investments. Instead they work through roughly 70 money managers, most of whom specialize in different investment sectors. In keeping with the goal of achieving market-beating returns, the Corporation looks for managers who may not be household names, limit assets under management to be consistent with their opportunity set, and own their firms. Before Shuman’s team hires any of them, it seeks the approval of the trustees’ investment committee, which is headed by Boisi, a veteran of Goldman Sachs and JPMorgan Chase, who is now chairman of Roundtable Investment Partners.

The Corporation has been fortunate to attract Wall Street luminaries to serve on its investment committee. Boisi is its third chairman, succeeding Martin Leibowitz, formerly the Vice Chairman and Chief Investment Officer of TIAA-CREF (the world’s largest pension fund which itself incidentally was established by a $1 million 1917 Carnegie Corporation grant) and widely considered the leading authority on fixed income analysis. Vincent Mai, Chairman and CEO of private equity pioneer AEA Investors, was the committee’s first chairman, bringing to bear his investment banking and private equity experience as the portfolio was built out and diversified.

The committee doesn’t micromanage—Boisi has nothing but praise for the Corporation’s investment team—but it does discuss and debate appropriate asset allocation, the choice of fund managers and investments and other issues that come up. Says Boisi: “We view our role as oversight.”

The story of Carnegie Corporation’s emerging markets investments illustrates the challenges—and opportunities—that confront investment managers in this day of global trade and communications and capital that washes relatively unimpeded across borders.

“Emerging markets” is a fairly broad category that mainly encompasses markets outside the traditional developed world. The MSCI Emerging Markets Index, a widely followed benchmark in this sector, includes stocks from more than 20 countries such as South Korea, South Africa, Israel, Poland, Mexico and China. These are not the world’s poorest countries; in fact, South Korea and Israel are relatively affluent. On the other hand, money invested in stocks in Nigeria, Bangladesh or other off-the-beaten-path nations outside the index is unmistakably invested in emerging markets nonetheless.

The Corporation started investing in emerging markets in a small way during the early 1990s. In 1994, its total investment in this arena was $26 million, which amounted to 2 percent of an endowment that at the time was $1.1 billion. By the end of fiscal 2005 emerging markets investments had risen to some $230 million, or about 10 percent of the overall portfolio. This is partly because earlier emerging markets investments appreciated, but it is also the result of a conscious decision by the Corporation to invest more heavily in this sector. “We think emerging markets offer compelling value,” says Shuman.

Next page: Although Carnegie Corporation’s early executives might have been surprised by the organization’s emerging markets investments, a lot has happened between then and now, including jet travel, the development of sophisticated global financial markets and the success of once impoverished countries such as South Korea.

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