When Debby Kuenstner joined Wellesley College as its chief investment officer in February 2009, the financial world was mired in uncertainty — and so was the school’s endowment portfolio.
Kuenstner came to Wellesley from a stint as the CIO at Brandeis University, whose heavy investment in stellar hedge funds cushioned its endowment from the worst of the financial crisis. But Wellesley wasn’t in such an enviable position. The problem? It had a huge portfolio of private equity investments in real estate that was a ticking time bomb.
“Real estate just lags everything,” Kuenstner explains. “There was a big chunk of this portfolio that is going to underperform everything for some significant period of time. It literally took three or four years for that stuff to mark to market.”
Kuenstner, who had graduated from Wellesley in 1980 with a degree in economics, already had established a long career in the world of finance, working first for the Federal Reserve Bank of New York and then at a string of major financial institutions: Merrill Lynch, Putnam Investments and Fidelity Management & Research, as well as the DuPont Pension Fund Investment and Brandeis. While that varied experience would be critical in managing the endowment portfolio over the next 15 years, the most pressing part of her job at the time was to assure Wellesley’s board of trustees that the world wasn’t coming to an end.
“It was a scary time for everybody,” recalls Alicia Cooney, then head of Wellesley’s investment committee and intimately involved in hiring Kuenstner as the endowment’s CIO in 2008. “We still didn’t know which end was up, so her ability to be calm and rational and communicate adroitly to people who might not be as knowledgeable as the investment committee was the first order of business.” As Cooney notes, “not everybody on the board was an investment person. They’re all saying, ‘Oh my gosh, oh my gosh, Chicken Little.’”
“Debby inherited a pretty tricky portfolio” Cooney says. “We had overcommitted to real estate; it was illiquid, and we were in a spot.”
As Cooney recalls, the new CIO began monitoring the portfolio’s liquidity on a “day-to-day, week-to-week, month-to-month basis and created a report to calm the trustees that we weren’t going to be in a terrible liquidity crunch.”
The first priority was to do a “deep dive” into the real estate portfolio, Kuenstner says. “A lot of investment committees, especially 15 years ago, thought about asset allocation and manager selection and they didn’t really think about the in-between piece of that, which is, ‘What’s your strategy in real estate? What’s your positioning in venture capital?’ So we right away sat down and said, ‘OK, let’s do a deep dive into this real estate portfolio. Let’s understand its characteristics and its prospects.’”
The portfolio “first went sideways, then went down,” she explains. In the end, “we decided we would continue to invest in real estate but that we would have a very different set of criteria,” she says. “Now we have a very idiosyncratic, very small real estate portfolio. It’s not just, ‘Oh, we’re buying class-A office buildings and we’re going to put some leverage on it and we’re going to lease them up, and then we’re going to sell to some core buyer.’ We don’t really do that plain vanilla thing.”
Taking an idiosyncratic approach to the endowment has served the women’s college well. As of June 2023, the $2.9 billion fund had a 10-year return of 9.6 percent — ranking in the top quintile of all endowments of more than $1 billion, according to executive recruiter Charles Skorina, who tracks the business.
Kuenstner likes to say that the Wellesley endowment has another edge — its mission to educate women who will make a difference in the world.
Her mission-driven approach is a critical reason Kuenstner was hired, according to Cooney. Quite simply, she was an alum. “There is a certain loyalty. You care about your relationship with your alma mater,” says Cooney, who is also a Wellesley alum. That loyalty was especially important during the financial crisis and its aftermath, says Cooney, a co-founder of capital advisory firm Monument Group. “We knew that she was going to be an important contributor to the college as a whole.” Kuenstner also worked closely with Wellesley’s CFO and president during Covid tackling such issues as whether to raise debt and how it would affect the endowment and the rest of the university.
“Not only was she willing and able to do it, I think maybe having that Wellesley loyalty made her want the whole to succeed, not just the endowment pool of capital,” Cooney says. (Raising debt meant that during 2020 and 2021, Wellesley didn’t have to raid the investment portfolio to get the cash the college needed for operations.)
None of this was something Kuenstner imagined to be in her future when she was accepted to Wellesley in the 1970s. “Honestly, is there a child that is dreaming of becoming an institutional investor?” she asks. “It’s not an astronaut, it’s not president of the United States.” (Wellesley women are known for their ambition. One famous alum is Hillary Clinton.)
“Finance wasn’t really a big thing” in the rural part of northwestern New Jersey where Kuenstner grew up, she says. In her community, Kuenstner says that people in finance were simply “bankers who made loans.” Her father, a hospital administrator, was one of the few professionals in the area.
Going to a prestigious liberal arts college such as Wellesley gave her what she calls an opportunity to “explore things.” One of those things was economics. Before going to college, “I had no idea what economics was,” she admits. But Wellesley has a top-rated economics department, and econ soon became her major. “It was a way of thinking about the world that felt kind of intuitive to me,” she says.
Entering the job market after graduating from college in 1980 proved difficult, however. “On my [dorm] floor, we literally wallpapered the entire hallway with our rejection letters,” she recalls. “And in the bathroom we had postings of jobs you could definitely get. That included things like selling Reader’s Digest on the phone, and perhaps working for a religious order.”
It was far from a “dream market,” she says. “I sometimes joke that I did the logical thing, which is I went to work for the government.”
Kuenstner landed a job at the Fed as a research assistant, a move from Greater Boston — where Wellesley is based -- that allowed her to join her husband in New York, where he was studying architecture. Her next stop was at Merrill Lynch’s securities research department. “I saw institutional investors and almost entirely long-only equity shops, and it really taught me right from the get-go, there’s a lot of ways to skin the cat,” she says.
For example, “to beat an index, you can have a quantitative strategy that holds a lot of stocks and makes a lot of small bets, and on average gets 51 percent or 52 percent of those little bets,” she explains. “Or you can hold a portfolio that owns 10 stocks that you deeply understand. And so there’s a wide range of ways to make money, which I think is useful as a framing for an allocator.”
After leaving Merrill, Kuenstner worked at DuPont for eight years on its pension fund and then was the CIO of Putnam for seven years before becoming the managing director of research for Fidelity and then joining Brandeis in 2007. Early in her career, she also earned an MBA from New York University’s Stern School of Business.
The varied background was quite valuable. “What has always impressed me about Debby is her deep knowledge of markets,” says Jean Hynes, CEO and managing partner of Wellington Management and a member of the Wellesley investment committee. She was recruited for the role by Kuenstner, who has brought several women investors onto the committee, which historically had been dominated by men.
“She’s clearly the first wave” of women in CIO roles, says Hynes, who is a decade younger. “When she started out, there were very, very few women in the investment business.” Even as of 2019, only 20 out of 109 endowments of more than $1 billion had women CIOs, according to Skorina.
“Her job is to make sure she gets the managers to get the asset allocation right,” Hynes says. “Does she want to be in this part of the world? Does she want to be in privates, does she want to be in public equity? Does she want to be in growth equity? All of those are the decisions that she and her team make.”
One area that has served Kuenstner well is venture capital. Wellesley has a seasoned portfolio that includes exposure to what she calls “great managers” she inherited. (Before Wellesley had a dedicated CIO, it had an investment committee of local investors with ties to some of the oldest VC hands in the business.) The venture portfolio gained about 90 percent in fiscal 2021, pushing the long-term alternatives portion of the portfolio to 47 percent, Kuenstner says.
And while there were some markdowns since then, the portfolio hasn’t been hit hard. “We have a mature private equity portfolio that has outperformed public equities by quite a large margin,” she says. The numbers are not simply marked to market either. “Because it’s a mature portfolio, a good portion of that is a realized record.”
Wellesley also has a small buyout portfolio, some growth equity and real estate. “But the results are really driven by our venture portfolio,” she says.
After the endowment rose 46.5 percent in fiscal 2021, it fell 9.9 percent in fiscal 2022 — far less than the broad public markets — but gained only 4.3 percent in 2023.
Kuenstner has managed to avoid the need for liquidity that has helped power one of the biggest trends in private equity: secondaries. Wellesley did a large secondary sale in 2018. “It was mostly old funds with managers that we were not re-upping with. And we looked at them and we said, ‘Well, these are kind of B-minus assets.’” That year was a “pretty darn good market,” she says. “And if you weren’t exiting in 2018, I was like, ‘When are you going to exit?’”
“It wasn’t for liquidity. It didn’t look great until the pandemic. And then it was like, ‘Oh yeah, these guys, they’re never going to sell these assets.’”
In general, she has eschewed investment fads of all stripes — including private credit, which has lured so many allocators in the past few years.
“It’s not a strategy that I find attractive,” Kuenstner says. “Credit earns more than government bonds, but it doesn’t earn as much as equity, and when it suffers, it suffers at the same time as equity.”
She is also wary because much of private credit is covenant-light, “so the downside protection is less,” she says. “There is a real element of thinking about what can go wrong and how much can we as the allocator protect against that?”
When bank credits go bad, Kuenstner says, the banks “have loan workout groups. And it can be enormously time-consuming for an organization to do the workout.” She recalls the financial crisis to explain her reticence. “One reason the financial crisis was as bad as it was is because all those residential mortgages got sold into collateralized structured finance vehicles,” she explains. The people who run CLOs and CMOs don’t have any workout capacity, and they own thousands of securities. When those credits became impaired, they had no choice but to sell the securities “at pennies on the dollar to the likes of hedge funds,” Kuenstner notes.
She predicts that instead of safeguarding capital, some private credit funds won’t be able to return it. That could be a shock. “The people who put those in their portfolio are thinking, ‘Oh, at a minimum I get my capital back and then I get more on top,’” she says.
Elizabeth Desmond, another Wellesley alum and investment committee member, explains Kuenstner’s strengths by saying “to be a really good investor, it’s not just about selecting the best investments, it’s truly understanding the objective of the organization on whose behalf you’re managing the money and what you’re trying to achieve.”
For example, she says Kuenstner built a specific hedge fund portfolio that would provide stability while maintaining significant equity exposure. “Ultimately, she said, the endowment is a portfolio with multiple generations of time period so you really need to have a very high equity exposure in that portfolio.”
Kuenstner is also willing to look at a popular investment “and try to understand if there’s something there,” says Desmond, the deputy CEO and founding partner of Mondrian Investment Partners.
However, “she definitely doesn’t follow the crowd,” Hynes adds. The Wellesley team engages in “deep, deep due diligence” on an area that could be an opportunity for the endowment, and the decisions Kuenstner ultimately makes are based on that research, she says.
Crypto is a case in point. Kuenstner says she did a huge amount of work on cryptocurrencies and the blockchain, but decided not to invest in crypto funds “because I just can’t understand it. I just couldn’t come up with use cases. How is this going to change the world?”
And with Wellesley’s mission of educating women who will make a difference, changing the world is never taken lightly.
