The Nature Conservancy (TNC) is one of the world's leading environmental nonprofit organizations, with a mission to protect the lands and waters that all life depends on. Its investment portfolio plays a direct role in funding that mission — making disciplined, data-driven portfolio management essential. CIO Bola Olusanya sat down with Solovis to discuss how he uses factor-based investing and Solovis Risk Pro to manage the portfolio and support TNC's long-term goals.
Bola Olusanya Chief Investment Officer The Nature Conservancy
Bola Olusanya is CIO at The Nature Conservancy. Prior to TNC, he served as MD of Asset Allocation and Portfolio Strategy at Key Private Bank, MD of Public Equities at Strategic Investment Group, and MD of Investments at Vanderbilt University. He holds an MBA in Finance from Emory University, an MS in Computer Science from the University of Lagos, and a BS in Computer Science from the University of Ibadan.
Olusanya is a 2015 recipient of Institutional Investor's Investor Intelligence Award for endowment and foundation risk management and was named to ai-CIO's "40 Under 40" in both 2013 and 2014.
Q & A
Q: As a new CIO, how did you get up to speed on your current portfolio? How does your organization use factors to manage the portfolio?
I have spent my first three months getting a deep understanding of our investment portfolio. This has involved having meetings and calls with every manager in our public investment portfolio and a handful of our private investment managers. It's important to understand the history of these managers, the roles they play within our broader portfolio, as well as their ability to generate consistent risk-adjusted returns. I'm also very fee-conscious, especially given the low-return world we live in. So it's important for the investment managers we partner with to have reasonable management fees, and incentive fees, where they exist, need to be aligned with TNC's goals.
Naturally, ESG and impact investing are important elements of TNC's investment philosophy. As I've been engaging with our investment managers, I have been keeping an eye on their efforts at being better stewards of the environment, how they are embracing a socially diverse workplace and culture, and how they are helping to implement strong corporate governance practices in the businesses they invest on TNC's behalf.
These qualitative due diligence and re-underwriting exercises have been very important, but equally important has been the quantitative analysis of the drivers of risk and return within our overall portfolio and the individual managers. I have relied on Solovis Risk Pro's factor-based risk and return attribution tools to unearth critical insights that have helped shape some of the decisions we have been making since I joined. For example, I've been able to quantitatively identify managers that are truly skilled, whose excess returns are not driven by exposures to risk factors. The converse is also true, but the good news is that these managers are in the minority.
Q: Have you noticed a shift in focus on factors versus traditional asset class diversification?
There has definitely been a semantic shift in the focus on factors. I think true adoption and implementation of a factor-based asset allocation framework is still in its infancy. What I think is undeniable is that the investment industry has recognized that certain risk factors permeate across various asset classes and it is important to group these risk factors together and make investment decisions accordingly.
I think a tool like Risk Pro should help increase the adoption of the risk factor framework because of its ease of use and intuitiveness of the results. The next five years should be exciting for allocators who embrace this relatively new paradigm as it will force us to focus on issues that are most impactful to our portfolios — risk factors — rather than less impactful issues like asset classes, individual managers, individual stocks or individual bonds. The result will be better decisions, better portfolios and better outcomes.
Q: Does TNC make use of returns and/or holdings-based analysis when monitoring the portfolio? What do you see as the pros/cons of each?
Yes. We use Risk Pro for our returns-based analysis while we are in the process of onboarding a tool for holdings-based analysis. The elegance of returns-based analysis is its simplicity and applicability to multiple asset classes or strategies. All you need are the historical returns. Two main shortcomings are the fact that you need to have several months of returns to make any meaningful conclusions and the fact that if you're trying to understand regional, sector or industry exposures at a given point in time, you are better off running a holdings-based analysis.
The major shortcoming of holdings-based analysis is that it can be complex and is only effective when analyzing long-only equity investments (and fixed income in some cases). Hedge funds, due to their limited holdings-based transparency, are often not suitable for holdings-based analysis. The same goes for private investments in general.
That said, both are important, and like the parable of the blind men and an elephant, they provide different but useful perspectives of the portfolio.
Q: What are the challenges CIOs and other institutional leaders face today that perhaps they didn't face in the past?
The biggest challenge facing CIOs and institutional leaders today is how to generate the required returns to meet their liabilities or long-term obligations in what is undoubtedly a low-return world. Even before COVID-19, the myriad efforts by global central banks to lower short-term borrowing rates and pump an inordinate amount of liquidity into the financial system has caused unprecedented imbalances. For pension funds, their liabilities have ballooned, and endowments and foundations are facing steep hurdles to meet their inflation-adjusted spending rates. As a result, investors have been forced to move up the risk curve and a focus on valuations has mostly gone unrewarded.
Q: How did you start your career in investment management?
I studied computer science at the undergraduate and graduate levels, so investment management was the last career on my mind during those years. My big break came while I was getting my MBA at Emory University. I was lucky to get the opportunity to work for the investment office at Emory, thanks to Matthew Wright, who later became CIO at Vanderbilt and hired me there too.
Investment management has been an incredible career for me. There are two things I love the most about my job. First is the fact that you are constantly learning and growing. Every geopolitical event in the world, even in remote corners, has an impact on your investment portfolio.
The second, and perhaps the more important reason I love this industry, and my current role at TNC specifically, is that every day, if I do my job well, I am helping to achieve the organization's mission to protect the lands and waters that all life depends on. I do believe that climate change is an existential threat to humanity and the work that my colleagues at TNC and other environmental organizations are doing is critical to ensuring that our planet survives. The performance of our long-term investment portfolio, which I oversee, plays an important role in supporting this mission. So, I wake up every morning fully energized and ready to do my part in this critical mission.