Allocating assets, part 2 – Schools shift investments

[Editor’s note: This is the second of six articles examining endowment strategies by charitable organizations.]

By Todd Cohen

Many colleges and universities are shifting some of their endowment assets to bonds from equity.

Among 610 institutions surveyed by the National Association of College and University Business Officers in Washington, D.C., bonds represented 24.9 percent of $236 billion in total endowment assets in 2001, up from 22.5 percent a year earlier.

While returns on bonds are slightly lower than on stocks, bonds represent a safer investment, says Damon Manetta, NACUBO’s manager for external affairs and media relations.

“The volatility is not as great as stocks,” he says. “And there’s a guaranteed rate of return on bonds.”

The Massachusetts Institute of Technology in Cambridge saw its endowment – sixth-largest among U.S. colleges and universities – fall to $6.1 billion in 2001 from nearly $6.5 billion in 2000.

While MIT won’t disclose details about its investments, they are “extremely diversified,” with a “substantial amount of alternative categories beyond the stock and bond market,” says Allen Bufferd, the school’s treasurer.

A long-term perspective and a clear formula setting an endowment’s payout are key challenges for colleges and universities, as well as for other charitable organizations, Bufferd says.

Like many endowments, he says, MIT sets its payout based on performance over 36 months.

“If they’re disciplined about that,” he says, endowments “are usually able to weather most storms.”

The Charlottesville-based University of Virginia Investment Management Co., created in 1998 to manage the school’s $1.7 billion endowment, has been shifting investments away from public equity holdings, says Alice Handy, UVIMCO’s president.

A “continuous” investor in private equity, she says, UVIMCO also has put much of its portfolio into hedge funds, which endowment managers use to “hedge” their market risk because the funds invest both in stocks expected to rise in value and those expected to fall.

Heavy investments in venture-capital funds starting in 1998 reaped a windfall for UVIMCO in 1998, 1999 and 2000, when startup companies in which the funds had invested sold stock to the public for the first time or were acquired.

As a result, Handy says, private partnerships in which UVIMCO had invested – including real estate, oil and gas and private equity – had grown to 41 percent of its portfolio by June 30, 2000, while hedge funds represented 15 percent.

Today, hedge funds represent 50 percent of the portfolio, while private equity represents 19 percent, with the remainder in public equities – both international and domestic – and fixed-income investments.

“We essentially flip-flopped our private-equity and our hedge-fund position in a year’s time,” Handy says. “The university has been very consistent in having an equity bias in the fund and a long-term vision.”

NEXT: The shift to alternative investments.

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