Top US Universities' Endowment Fund In Deep Trouble

Article from NYT:

Steep investment losses have caused painful cutbacks at some of the best-known universities over the most recent fiscal year and have prompted questions about whether their endowments are taking too much risk. But as the schools, one by one, disclose their numbers, the managers of these endowments are indicating their continued support for a diversified portfolio chock full of alternative investments like hedge funds, private equity and real estate — the very things that have caused so much trouble.

This portfolio strategy is sometimes called the Swensen model, after David F. Swensen, who heads the Yale endowment. On last Tuesday, Yale disclosed the details of its year, reporting an investment loss of 24.6 percent, compared with an average drop of 17.2 percent for large funds, according to the Wilshire Trust Universe Comparison Service. The fiscal year for all major university endowments ended on June 30.

Preferring to emphasize their long-term results, the chiefs of many big endowments, including Harvard, Yale and M.I.T., have indicated they are sticking with their models. Notably, Mr. Swensen did not lay out Yale’s asset allocation for the coming year in his statement — something he has done in years past. Yale pointed out that even after its latest loss, it has produced an average annualized gain of 11.8 percent over the last 10 years. According to Wilshire, the average return during that period was 4.3 percent for endowments with more than $1 billion in assets. Just how unhappy fiduciaries are with the returns last year depends on whether they are focusing on one-year returns or 10-year returns.

A number of institutions will be looking for ways to avoid some of last year’s biggest headaches, like not having enough cash on hand to meet capital calls, as required under their contracts with private equity and similar funds. Harvard, which was down 27.3 percent last year, has acknowledged it suffered a cash squeeze and has since raised its portion in cash, among other measures.

“In most cases they will make small changes in the allocation to various categories,” said Byron Wien, vice chairman of Blackstone Advisory Services. “People are gradualists.” Along with holding more cash, Mr. Wien says he believes that endowments need to have more funds in emerging markets and in the credit markets as growth slows in the western world.

The biggest endowments seem to have stumbled the most in percentage terms last year. Doing better than either Harvard or Yale, the Massachusetts Institute of Technology said that its fund fell a more modest 17 percent and that its diversification strategy of embracing alternative investments had indeed cushioned its portfolio, a third the size of Harvard’s, against the market swoon.

By contrast, Yale said that diversification had failed to protect its asset values. The biggest drag on its performance was a 34 percent decline in its largest asset class, known as real assets, which include real estate, commodities and timber. Over all, the Yale fund fell to $16.3 billion at the end of June. That decline included a $5.6 billion loss from investments, $1.2 billion that was applied to the university’s budget and $200 million in new gifts.

Some big schools remain skeptical about the push for alternative investments. TheUniversity of Pennsylvania did relatively well in an abysmal year, reporting a drop of 15.7 percent, and did not have a lot invested in private equity, real estate and natural resources. The school’s endowment chief, Kristin Gilbertson, said that she had been slow to get into private equity and real estate after she took over in 2004 because she worried that the size of private equity funds was too large and their fees too high. Over a five-year period, Penn had an average annualized return of 3.5 percent. That compares with 8.7 percent at Yale. Still, Ms. Gilbertson says she is in a better position for growth now, partly because the fund has avoided some of the problems that will continue as a result of private equity deals struck from 2005 through 2007.

p/s photo: Zhou Wei Tong