Erik Lundberg: The man who manages the University’s billions

In a fifth floor suite of that building, a team of finance specialists in the University Investment 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 different investments in stocks, bonds, venture capital, 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 relatively 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. And in annual rankings published by the National Association of College and University Business Officers, the University’s endowment climbed from 13th overall and 4th among public universities 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 for the University, 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 uncertainty. 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 and sooner. 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 endowment funds lost an average of 4.4 percent.

J. Ira Harris, a veteran investor and longtime member of an external investment committee that advises the chief investment officer and investment team, says Lundberg’s job is paramount to the success of the University of Michigan.

“There are a very important number of jobs at Michigan, including the president, including 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 managers from throughout the world.

Nor does he fit “master of the universe” financial guru image, either. Over two interviews in October and January at the Investment Office, Lundberg spoke with me about his job, how the endowment works and his thoughts on the future of the financial markets. In each interview, his modest, laid-back tone and impression (he prefers sport jackets with khakis or jeans over suits) belied the subject of our conversations: billions of dollars of investments, a financial crisis crippling the global economy and the future of the University.

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 various assets classes — the groupings of investments like stocks or real estate 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 growing importance of the endowment. Today, the University, quite frankly, could not exist without it. And it follows that the University would not be where it is today without the man guiding the University endowment.

ALMOST 4,000 MILES from Ann 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, shipbuilding, 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 Lundberg 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, ConocoPhillips and Norway’s Statoil — have operations in or near the city, and the city website describes Stavanger as the “energy capital of both Norway and Europe.” This influx of wealth and prosperity to Stavanger provided the city’s young people with the opportunity to study business abroad and then return home, degrees in hand, to well-paying jobs in the lucrative oil industry.

Lundberg followed suit and traveled to Madison, Wis. as a 20-year-old to study business at the University of Wisconsin. 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 University. When asked about trading Scandinavia 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 investor 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 working in 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 people 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 Lundberg and his fresh-faced team took over in the final few months of 1999, valued at a modest $2.5 billion, was hardly the robust nest egg it is now.

PRIOR TO LUNDBERG’S ARRIVAL, management of the endowment was left to the University’s Treasury Office, which traditionally handles financial operations like debt and risk management (including University employee insurance coverage), check writing and oversight of the MCard program. Under the Treasury 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 better performing endowment because, as recent years had shown, poor endowment performance greatly hindered the University’s ability to raise money and court potential donors. When a donor gives money, the University’s investment team 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 daunting task in convincing potential donors to give.

“Well, the school does such a bad job investing 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 a new Investment Office, Lundberg’s first major task was establishing and training a team of analysts and experts working around him to grow the endowment. Looking back on Lundberg’s nearly 10 years 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 Slottow, who works closely with Lundberg, said the investment team, which Lundberg almost singlehandedly built and developed himself, today ranks as one of the top among all universities 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 investment team doesn’t mean hovering over their shoulders all the time. Instead, he believes in giving his analysts the autonomy to succeed on their own and to develop individually as investors. 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 Lundberg’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 international currencies.

Within the U.S., too, Lundberg and his team have succeeded in investing with some of the best investment partners. One such venture capital firm, Kleiner Perkins Caufield & Byers in Menlo Park, Calif., is one of the leading green technology 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 December, Harvard announced losses of 22 percent, or more than $8 billion, to its endowment, which was valued at $36.9 billion as of June 30. Likewise, the University of California endowment 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, too, has suffered losses. By early 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 from a major financial crisis.

When the dot-com bubble burst in 2000 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 first since Lundberg’s arrival. With the current financial crisis, however, Lundberg smartly protected the endowment in the years preceding 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 securities began suffering huge losses. Unlike other university endowments that watched their investments in mortgage-backed securities plummet, Lundberg and his team had deemed such investments 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 recording incredible returns, Lundberg came to Slottow with a proposal: He wanted to change the way the University determines the endowment’s payout, or the percentage of money that’s taken out each year for use by the University.

The endowment currently pays out 5 percent of its average market value each year to the University for operating costs, financial aid and other expenditures. At the time of Lundberg’s proposal, the time span taken into account when calculating the average market value for the 5-percent payout was three years. But to better shield the endowment from volatility in the market, Lundberg proposed extending that average market value calculation to seven years. The longer-term forecast would keep the payout consistent from year to year, regardless of financial market behavior, and allow University operations that use endowment funds to confidently plan for a fixed amount of funding each year.

Lundberg’s payout plan was given the go-ahead, and was instituted at beginning of the 2006 fiscal year. And today, as many universities make painful budget cuts due to decreasing funds from their endowment, the seven-year payout has allowed funding for University operations to stay consistent.

In retrospect, what was so impressive about implementing a seven-year average market value was Lundberg’s prudence to do so in the midst of an overwhelmingly bull market. “It’s easy to be complacent when things are going well, but, you know, we know that markets will go up and they will go down,” Lundberg said. “And so when markets go up, it’s a good time to take action and look out and say, ‘What could possibly happen?’”

LUNDBERG WILL BE the first to tell you that crises like the bursting of the dot-com bubble in 2001 or the fallout on Wall Street this summer aren’t nearly as destructive to a university endowment as they’re made out to be. That’s because a major university endowment, like the University’s, is invested in perpetuity for an infinite amount of time. There’s no end date for the endowment and no terminating point when all assets are sold off. Barring any unforeseen disasters, the endowment will be around for as long as the University.

With that in mind, Lundberg’s legacy as the first CIO, though not as easily seen, could be far more lasting than that of Mary Sue Coleman or Lloyd Carr. He has cultivated a nationally renowned investment team, consistently grown the total value of the endowment and implemented measures to protect the endowment from crises. And with his impressive investing track record, he has helped encourage more giving to the University, illustrated by the recently-concluded, $3.1-billion Michigan Difference fundraising campaign, which is the largest in history for an U.S. public university.

But you won’t hear Lundberg talk about his legacy. He is too invested in his job at the moment to think about how he will be remembered after he leaves it. This October will mark 10 years since Lundberg came to Ann Arbor. Hearing him talk, he could still be CIO for another decade or two.

“Before I got here, it was, you know, ‘Where am I going to next? Where am I going next?’ ” he said. “But now it’s, ‘I don’t want to go anywhere else. I’m happy here.’ This is a great institution. A great place to work.”