This past July, Kenneth Miranda became Cornell’s chief investment officer. He oversees the university’s $6 billion portfolio, following 16 years as director of the International Monetary Fund’s (IMF) investment office. He shares his plan for securing and increasing the endowment to provide resources to advance Cornell’s educational mission for faculty, students and future scholars.

Miranda

During the 2015-16 fiscal year, Cornell’s endowment posted a negative return. How do you assess its performance?

Like many large institutional endowments, Cornell continued to deal with broad financial market challenges following the global financial crisis. In general, this past year presented a highly challenging return environment, with many of our counterparts posting negative to slightly positive returns. Even in that context, our endowment return was disappointing.

Many factors came into play: slow economic growth in developed economies; the impact of sharp declines in commodity prices on numerous emerging economies; a challenging macroeconomic policy environment, with the U.S. Federal Reserve raising interest rates for the first time in nearly a decade, while the European Central Bank and the Bank of Japan modified and intensified their own quantitative easing programs or other unorthodox policies; and instability in governmental and social institutions around the globe (the Brexit vote was just one example). All of these led to significant volatility and a generally weak environment for risk assets. Cornell was not alone in negotiating these challenges.

Over the past five years, the university has still had to deal with the direct and echo effects of the 2008 economic crisis. In its immediate aftermath, Cornell needed to protect the capital structure of the university – and chose to increase the cash portion of the endowment and limit its risk posture in the interest of the university’s overall financial health.

While the crisis was painful and the portfolio had to take on a more defensive short-term posture after significant losses in 2008, the market rebound together with generous contributions from alumni, parents and friends had a powerful impact in helping to stabilize the university endowment during this difficult stretch.

I believe the university portfolio is turning a corner and can now return to a more appropriate long-term posture. As such, I believe we are poised for resumed growth of the portfolio – though the environment remains deeply challenging. Working with our staff and the board’s Investment Committee, we are making significant changes to our investment strategy – steps that we believe will allow us to outperform the broader markets and to be competitive with the best-run university endowments. Using new tools, techniques and strategies, we have the opportunity to reposition our portfolio to optimize sustained, long-term growth.

This fall, the Investment Committee approved relocation of the Office of University Investments to New York City. What is the rationale?

Ithaca is a wonderful place to live and work. Many of our staff enjoy deep ties to this community. However, relocating our team to the city places us at the center of the world’s financial hub. With a presence in New York City, we’ll be able to tap into more information points, leading to deeper insights and more productive collaborations. When it comes to investing, there is no substitute for strong networks and connections where there is proximity to capital markets. This is not an uncommon approach; already many of our peer institutions base their investment offices in New York or another financial hub.

How does your work at the IMF translate into managing Cornell’s investment portfolio?

At the IMF, I worked in a sophisticated, challenging and deeply thought-provoking global environment. I oversaw a team responsible for a globally diversified portfolio of $11.5 billion. Primarily I focused on global changes and trends driving markets, undervaluation that arose due to market dislocations, growth bottlenecks and discontinuities, and other opportunities for growth. At the same time, it was imperative to manage risk consistent with the objectives of a pension. At the IMF, I ran a pension plan that was relatively risk-averse – significantly more risk averse than most university endowments. Even with those constraints, we performed on par with or better than many of the Ivy League portfolios.

I’ll be the first to admit that I’m a competitive guy. I want to bring this same spirit to managing Cornell’s endowment and to ensure that we maximize our performance. I believe we have the roadmap to get there.

What’s your vision for the university endowment? What strategy shifts are necessary to maximize performance?

My first rule is “do no harm.” There is no reason to completely overhaul the existing approach; we have a solid foundation to build upon.

Our primary initiatives over the next 12, 18 or 24 months include undertaking systematic and thoughtful deep-dive reviews of our entire portfolio – asset class by asset class – and our operations. Our key priority is to improve our ability to take advantage of opportunities across global markets – thereby lifting our returns above what the global markets offer more generally. We need to navigate this carefully, since markets are generally richly valued. But we believe that we can boost returns (relative to the recent past and relative to the broad markets) in what is expected to be a difficult and challenging environment.

In this low-return world, we need to figure out how to consistently add value over what the broad markets provide. We have an expensive cost structure in our portfolio, and we’re beginning to address that.

We’re working more heavily on valuation discipline – the industry term for diligently doing the research and implementing a process to identify which assets are undervalued (and thus provide greater upside than downside potential) and which are overvalued, by the current market. We’re not just looking at asset allocation anymore; we want to know how to take our portfolio, tactically, to different areas of the capital markets and how to do that effectively. We want to tilt away from overvalued assets and instead identify the most promising strategies and asset classes. And we want to better control costs by addressing fees.

We will be working very hard to diversify our return streams – to invest more broadly in areas and return streams that are less correlated to one another. As an example, recently we introduced a return stream that relates to the re-insurance market. It sells small amounts, fully collateralized, of re-insurance to large insurance companies. The beauty of this return stream is it’s uncorrelated with the stock or bond markets. It’s actually less risky than most of our exposure in the equity markets. This is the sort of thinking I’m trying to get into the portfolio; if we have these very diversified return streams, we can have a much more stable overall return process.

You’re a proponent of applying cutting-edge tools and approaches to improve portfolio management. What does that entail?

We feel much more confident today than a few years ago that the university’s finances are solid, and we are now able to run the portfolio strictly for long-term investing rather than worrying about the liquidity needs of the university.

We are making significant changes to how the office is run, how the relationship between the office and the Investment Committee is managed, and the location of the office. I think that all of these changes have the strong support of the Investment Committee – and have been made easier by the fact that I had the privilege of serving on Cornell’s Investment Committee since 2012. Understanding the great pride and dedication that members of the Investment Committee have, their commitment to Cornell’s success, knowing the issues and knowing the investment team allows me to work with members of the Investment Committee very productively.

One of our first steps has been to initiate a sequence of comprehensive reviews of the short- and long-term performance of each asset class. The goal is to identify how each asset class can be better managed and how each asset class interacts with the other asset classes. We’ve already revamped how we approach real estate, resources, hedge funds, U.S. equities, non-U.S. equities, etc. We’ve done “gut checks” on our current approaches for each of these – with key clear takeaways on how to manage each going forward. In doing so, we have been applying more quantitative tools and systematic approaches than have been applied in the past. The level of analysis, I believe, is deeper, thereby providing greater insight into what has and has not worked well – and simultaneously elicits strong signals as to how to reposition the portfolio.

We are working toward an integrated set of new operational and analytical tools aimed at improving quantitative analysis and reporting. We are developing a true portfolio management information system. All of these tools will make us more effective and more efficient – though they take time to build.

Initial growing pains are possible, but I am confident that we will see a payoff in 18-24 months as all these efforts and strategy shifts flow through. The goal is not the day to day, the month to month – the real goal is to improve our absolute and relative performance (relative to benchmarks and peers) over the next three to five years. At the end of the day, it’s about the future.

What’s the value of the endowment to Cornell? How does it support university goals?

The endowment ensures long-term stability for the institution: a rock-solid revenue stream that provides for the running of the university and furthering its academic goals while also providing and ensuring the affordability and accessibility of the university.

I just finished reading a terrific book about how Ezra Cornell seeded the endowment. We need to live up to Ezra’s vision – and do so with the same energy, thoughtfulness and drive. We need to be true to his dreams and aspirations for Cornell, which has become a leading global research institution, built on his vision.

The endowment itself is a binding commitment: The university applies funds given to the endowment to further the mission or missions a donor has chosen to support; and the university also has to manage those funds carefully to ensure they remain a bedrock of support that future scholars, researchers and students can rely on in the decades ahead.

It allows the provost to invest in interdisciplinary faculty hiring, for example, or for the university to ensure access to the most qualified students regardless of their ability to pay. Always keeping Cornell’s broadest goals in mind when thinking about the endowment positions us to continue to be a leader in higher education, to be able to act boldly, and to set the standard for public engagement and outreach.