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The Michigan Daily - Wednesday, February 4, 2009
Wednesday, February 4, 2009 -The Michigan Daly
I
Erik Lundberg is the biggest name on
campus that you don't know. As chief
investment officer, he oversees the
University's multi-billion-dollar
endowment. And in the midst of a financial
crisis, he has never been more needed.
By Andy Kroll
Daily Investigative Editor
The most important office in the entire
University of Michigan system isn't
even on University property. About a
mile from the Ann Arbor campus, it's at the
cornerofHuron Street and Main Street, where
a towering, angular office building looms large
over the city's business district.
In a fifth floor suite of that building, ateam
of finance specialists in the University Invest-
ment office are hard at work managing the
school's vast investment portfolio. The largest
of these is the University's multi-billion-dollar
endowment - a portfolio of over 6,000 differ-
ent investments in stocks, bonds, venture capi-
tal, real estate and energy, among others - and
the school's financial backbone.
At the entrance to the Investment Office is
a glass door that bears the University seal, a
reminder of nearly 200 years of history. And
it's the job of the investors on the other side of
that door to lay the financial groundwork for
another couple centuries of maize and blue.
Leading that team is Erik Lundberg, the
University's 49-year-old, Norwegian-born
chief investment officer.
Since arriving in Ann Arbor in the fall of
1999, Lundberg has transformed a relative-
ly modest portfolio into one of the leading
endowments in all of higher education. Before
the collapse of the financial markets last fall,
Lundberg had more than tripled the value of
the endowment - from $2.5 billion in 1999 to
$7.6 billion as of June 30. For the 2007 fiscal
year, the endowment recorded a return of over
25 percent, one of the highest in the country.
In annual rankings published by the National
Association of College and University Business
Officers, the University's endowment climbed
from13th overall and 4th among public schools
in 2002 to 8th and 2nd, respectively, in 2007.
The success in investing couldn't have come
at a better time. State appropriations, once
a substantial and reliable source of funding,
have decreased more than $96 million in the
past seven years when measured for inflation
- meaning that the University must rely on its
endowment more than ever before.
Lundberg is the one who must guide the
University through the current financial crisis,
guarding the endowment against depletion at
a time when donors are tightening their belts
and the stock market is wrought with uncer-
tainty. It's a difficult job and the University has
not ridden through the recession unscathed.
Since the beginning of the fiscal year on July 1,
the endowment has lost an estimated 20 to 30
percent of its value. But with the economy as it
is it's to Lundberg's credit that the University
wasn't hit harder andsooner. The endowments
of other major universities can attest to that -
in June 2007, when the University recorded a
6.4 percent on its investments, large endow-
ment funds lost an average of 4.4 percent.
J. Ira Harris, a veteran investor and long-
time member of an external investment com-
mittee that advises the chief investment officer
and investment team, says Lundberg's job is
paramount to the success of the University.
"There are a very important number of jobs
at Michigan, including the president, includ-
ing the head football coach and including the
chief investment officer," Harris said.
Yet unlike University President Mary Sue
'Coleman or Michigan football coach Rich
Rodriguez, Lundberg keeps a low profile on
campus.,He tends to stick to his downtown
office - that is, when he's not on the road,
meeting investing partners and fund manag-
ers from throughout the world.
Nor does he fit "master of the universe"
financial guru image, either. Over two inter-
views in October and January at the Invest-
ment Office, Lundberg spoke with me about
his job, how the endowment works and his
thoughts on the future of the financial mar-
kets. In each interview, his modest, laid-back
tone and impression (he prefers sport jackets
with khakis or jeans over suits) belied the sub-
ject of our conversations: billions of dollars of'
investments, a financial crisis crippling the
global economy and the University's future.
His faint Norwegian accent affecting the
occasional word or two, Lundberg described
the composition of the endowment simply,
patiently,.for someone unfamiliar with long-
short trading strategies or derivatives. For
instance, in discussing the endowment's vari-
ous assets classes - the groupings of invest-
ments like stocks or realestate worth hundreds
of millions of dollars each - he referred to
them instead not as complex financial assets
but as "buckets" with money in them.
That modesty, however, understates the
growingimportance ofthe endowment.Today,
the University, quite frankly, could not exist
without it. And it follows that the University
wouldnot be where it istoday without the man
guiding the University endowment.
ALMOST 4,000 MILES fromAnn Arbor lays
the port city of Stavanger, Norway, located on
the country's southwestern coast bordering
the North Sea - territory once occupied by
Vikings. It was in this nearly 1,000-year-old
city founded on industries like shipping, ship-
building, fishing and canning where Lundberg
grew up. And it was with the discovery of oil in
the North Sea off of Norway in the late 1960s
that the futures of both Stavanger and Lund-
berg were transformed.
With money flowing in almost as fast the
newfound oil, Stavanger quickly grew into a
thriving energy hub for all of Europe. Today,
nearly every major oil corporation in the world
- Shell, BP, Exxon Mobil, Total, ConocoPhil-
lips and Norway's Statoil - have operations in
or near the city, and the city website describes
Stavanger as the "energy capital of both Nor-
way and Europe." This influx of wealth and
prosperity to Stavanger provided the city's
young people with the chance to study busi-
ness abroad and then return home, degrees in
hand, to well-paying jobs in the oil industry.
Lundberg followed suit and traveled to
Madison, Wis. as a 20-year-old to study busi-
ness at the University ofWisconsin. But instead
of returning to Norway, he stayed in the U.S.
after meeting his future wife in Madison. He
then went on to earn an MBA in finance and
international business from Ohio State Uni-
versity. When asked about trading Scandina-
via for the Big Ten, Lundberg laughed, saying
that the Midwest was his home now. "I like it
here," he said. "I like public schools; I went to
public schools."
In 1986, after graduating from Ohio State,
he began working in corporate finance at
Wisconsin Bell and later took a job in inves-
tor relations with phone company Ameritech.
Lundberg rose within the company to become
an international equity analyst and then an
investment strategist in Ameritech's pension
department in Chicago. But by that point, he
decided he needed a new challenge. That's
when the University of Michigan, in the midst
of a national search for its first-ever chief
investment officer in 1999, came knocking.
Harris, of the external investment advisory
committee, was workingin Chicago at the time
as an executive for a major private investment
firm, and interviewed Lundberg on behalf of
the University for the CIO position. At the end
of the interview, Harris immediately knew
the search was over. "After spending a couple
hours with him my response back to the peo-
ple in Ann Arbor was if they didn't hire him, I
was going to hire him," Harris said.
University officials took Harris's advice and
hired Lundberg to be the first CIO. He would
be in charge of getting the University's newly
conceived Investment Office off the ground
and responsible for building a new investment
team from scratch. Yet the endowment Lund-
berg and his fresh-faced team took over in the
final few months of 1999, valued at $2.5 billion,
was hardly the robust nest egg it is now.
PRIOR TO LUNDBERG'S ARRIVAL, manage-
ment of the endowment was left to the Uni-
versity's Treasury Office, which traditionally
handles financial operations like debt and risk
management (including University employee
insurance coverage), check writing and over-
sight of the MCard program. Under the Trea-
sury Office's direction, the endowment made
small gains - $1.9 billion in the 10 years before
Lundberg arrived - and measured poorly
against portfolios at comparable universities.
"The University went through a long, long
time years ago with terrible performance in its
investments, in its endowments," Harris said.
University officials knew they needed a bet-
ter performing endowment because, as recent
years had shown, poor endowment perfor-
mance greatly hindered the University's abil-
ity to raise money and court potential donors.
When a donor gives money, the University's
investment tyam generally invests it in hopes
of generating the largest returns possible on
the original donation amount. But when the
endowment was recording poor investment
returns, University fundraisers faced a daunt-
ing task in convincing donors to give.
"Well, the school does such abad job invest-
ing it, I'll invest it and give it to you myself,"
Harris said, recalling a common response he
heard from donors during capital fundraising
campaigns.
All that began to change around the turn
of the century. As the new CIO leading ; new
Investment Office, Lundberg's first major task
was establishing and training a team of ana-
lysts and experts working around him to grow
the endowment. Looking back on Lundberg's
decade as CIO, colleagues say the development
of a top-notch investment group has been one
of Lundberg's main achievements.
University chief financial officer Tim Slot-
tow, who works closely with Lundberg, said
the investment team, which Lundberg almost
single-handedly built and developed himself,
today ranks as one of the top among all uni-
versities public and private. And he did this,
Slottow added, without hiring senior investors
away from elite hedge funds or endowments.
"He's done it rather by hiring, you know, junior
or mid-level analysts, and working with them
to develop their expertise and their ability to
really learn what he does," Slottow said.
For Lundberg, managing an elite invest-
ment team doesn't mean hovering over their
shoulders all the time. Instead, he believes in
givinghis analysts the autonomytosucceed on
their own and to develop individually as inves-
tors. One of his key ingredients for successful
endowment investing, as he described it in an
investment presentation last April, is to "Allow
staff to excel as long term investors."
In terms of strategy, one hallmark of Lun-
dberg's tenure as CIO has been to diversify
the endowment by increasing the number of
investments made abroad. In the nine years
since his arrival, Lundberg and his team have
increased investments in markets like China,
Japan, Hong Kong and Russia. And until the
global financial crisis devalued investments
worldwide, this internationalization of the
endowment reaped dividends for Lundberg
and his investment team, especially due to the
U.S. dollar's decline in comparison with inter-
national currencies.
Within the U.S., Lundberg and his team
have succeeded in investing with some of the
best partners. One such venture capital firm,
Kleiner Perkins Caufield & Byers in Menlo
Park, Calif., is one of the leading green tech-
nology funds in the country, if not the world.
Kleiner was the subject of a New York Times
Magazine cover story in October, and lauded
by The Times as "a temple of capitalism."
No university endowment is immune from
the global financial turmoil. In early Decem-
ber, Harvard announced losses of 22 percent,
or more than $8 billion, to its endowment,
which was valued at $36.9 billion as of June30.
Likewise, the University of California endow-
ment lost $1 billion-in the first nine months of
2008, $700 million of which tanked between
July and the end of September.
The University of Michigan's endowment
has suffered losses, too. By December the
endowment had lost between $1.52 billion and
'$2.28 billion. And it wasn't the first time the
endowment took a hit ina financial crisis.
When the dot-com bubble burst in2000 and
2001, the endowment recorded an first annual
loss of $200 million, dropping from $3.6 to
$3.4 billion - it's first loss in 12 years, and the
firstsince Lundberg's arrival.With the current
financial crisis, however, Lundberg smartly
protected the endowment in the years preced-
ing the recession and lessened the impact such
a crisis would have.
As the full scope of the subprime credit
crisis became apparent in 2006 and 2007,
investments in risky mortgage-backed securi-
ties began suffering huge losses. Unlike other
university that watched their investments in
mortgage-backed securities plummet, Lun-
dberg and his team had deemed such invest-
ments too risky, and avoided what in fact
turned out to be a toxic market. "We didn't get
paid enough for taking that risk," Lundberg
said. "So we steered away from the subprime...
and focused the investments other places."
But Lundberg's most notable move was
changing the way the endowment pays out
money to the University. A little over two
years ago, when the endowment was record-
ing incredible returns, Lundberg came to Slot-
tow with a proposal: He wanted to change the
way the University determines the endow-
See LUNDBERG, Page 8B