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The James Irvine Foundation Shows What a Small List of Managers — And a Big VC Portfolio — Can Achieve

Everyone talks about winning their list of managers. The James Irvine Foundation shows how to do it and outperform.

The $3.8 billion fund has generated solid returns by having a shorter list of managers than most foundations of its size — as well as a large allocation to venture capital.

Chief investment officer Tim Recker said about 90 percent of the fund’s assets are overseen by just 25 external managers. This means that each of the six in-house investment professionals only needs to manage a small number of relationships. That strategy, in addition to 30 percent in venture capital, helped Irvine achieve a return of 48 percent in 2021. The foundation beat the policy benchmark over 3-year, 5-year, and 10-year time periods.

“I describe the strategy [as] ‘dare to be different.’ We can’t get exceptional returns if [we’re] like everybody else,” said Recker.

By working with a smaller number of managers, Recker and his team have more bandwidth to conduct due diligence. “Given our level of concentration, there’s no place to hide when you’re wrong,” he said. “Every mistake that we make on the manager selection side shows up at an entity-level performance.”

Investing in a short list of managers requires buy-in from an in-house team that may want more action. Many investment professionals want to deploy capital frequently so that they can advance their careers, but that’s a red flag for Recker. “I’m very deliberate with my team about what’s best for the institution,” he said. “That requires hiring people [with] a level of maturity. That means that if they don’t make a new investment for years, they’re okay with it.”

Recker also needs to work closely with the investment committee and convince them that the fund’s high allocation to venture capital is justified. About one-third of the fund’s assets are deployed in venture capital, which can jeopardize the fund’s short-term performance. This year the allocation likely took a toll on performance. But Recker believes that success in venture capital should be measured on a longer time horizon. “That requires alignment between the CIO and the investment committee,” he said. He added that another 30 percent of the fund is allocated to a multistrategy portfolio, which, with a beta of 0.3, has delivered equity-like returns over the past five years. It can also protect investors from market drawdowns.

To maintain a short list of managers, the fund has to have high standards. Recker said that only managers who can deliver returns in the top decile will be considered. “Exceptional people…don’t tolerate mediocrity. We’re looking for folks [who are] trying to strive for that.”

Recker added that he is open to working with managers who don’t have prior investment experience. The foundation once backed someone who had worked as an operator in venture capital. After getting good reviews from trusted executives, Recker was confident that the candidate would become an exceptional manager. “We don’t care whether they have a track record, [as long as] we’re backing great people,” he said.

The CIO said his efforts to create a collaborative environment also contributed to the fund’s strong returns. Almost all investment decisions involve the whole team, and Recker encourages all team members to help refine each other’s investment decisions. “One of our competitive advantages is intellectual capital,” he said.

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