End of Year Finance Statistics Put Endowment in Focus

Selina Koller

The year-to-year investment performance as per the June 2012 fiscal year of endow-ments of many institutions turned out to be much smaller than normal, according to an October 12 article in the New York Times. For example, Harvard’s endowment was basi-cally even for the fiscal year, while the average endowment performance was a one percent decrease during the period, according to the Harvard Magazine website. In a list of endowment sizes published in the beginning of 2012 by the National Association of College and University Busi-ness Officers (NACUBO), Colgate ranked number 106, with an endowment listed as $693,436,000, though it is currently at about $710,000,000. Immediately preced-ing Colgate on the list was Rutgers. Har-vard University had the largest endowment, with $31,728,080,000. “When we consider Colgate’s endow-ment, our focus is what is best for the Uni-versity, not the comparison to other schools,” Director of Investments Joseph Hope said. Harvard, for example, has roughly 25,000 more students than Colgate, and thus a larger endowment is necessary. Joseph Hope is responsible for the in-vestment portfolio of the endowment. The investment returns this year (as per June 30) have been just about one percent in-crease, thus doing slightly better the aver-age of endowments. However, the 10-year return on investments was a 6.8 percent in-crease per year, which is on par with many other institutions. The endowment contributes about 20 percent of Colgate’s operating budget – tu-ition is the only larger contributor. Accord-ing to Hope, in the past 10 years, Colgate has spent $273,000,000 from the endowment, and $319,000,000 since 2000. The economic recession that began in 2008 negatively affected the endow-ments of many institutions, because most endowments are heavily invested in stocks, bonds, commodities and other types of risky investments, and thus they are suffering from the volatility of the markets. Colgate, however, fared better than most during the recession, espe-cially compared with some of the larger (and larger endowed) universities. “We managed our liquidity well prior to 2008 and could dislocate from the market when the recession hit,” Hope said. “Oth-er universities had to fund their liquidity because they were fully invested, and thus they were hit much harder than us during the recession.” Because the market value of cash and money market investments did not go down in value during the market collapse, a high level of liquidity meant that the market value of Colgate’s endowment did not decrease in value as much as fully invested endowments. Furthermore, a high level of liquidity al-lowed the endowment to fund its alternative investment capital calls out of its liquidity rather than having to liquidate investments at an inopportune time. Another advantage of that high level of liquidity was that Colgate was able to take advantage of some market dislocations. “From 2008 into 2009, we invested in the Term Asset-Backed Securities Loan Facility (TALF), distressed securities and secondary funds when some pretty extraordinary opportunities presented themselves,” Hope said. “Because we were in an advantageous liquidity position we were able to act quickly in conjunction with the guidance and direction from the Committee.” Investing in TALF, distressed securities and secondary funds when they were de-pressed by the recession meant that Hope could buy low, and as the economy got bet-ter, the endowment reaped the benefit of rising prices in these assets. Hope focuses on keeping a well-diversified endowment portfolio. As of June 30, 2012, the asset allocation break down was 24 percent in public equity, 15 percent in long / short eq-uity, 19 percent in private equity, 19 percent in absolute return hedge funds, five percent in fixed income, five percent in cash, five percent in real estate and four percent in commodities.

As far as portfolio management is con-cerned, Hope said, “…we certainly do not trade. We want best-in-class managers across all asset classes while maintaining the flex-ibility to act quickly depending on market conditions. Of significant importance to us is capital preservation.” “We are very flexible with our investment strategy,” Hope said. “We have broad guide-lines for each asset class, and because we maintain good liquidity, we generally have plenty of dry powder to take advantage of market dislocations if and when they occur.” A liquidity report is compiled each month, and thus the amount of liquidity available is well assessed. “Our overarching goal for the endowment is achieving intergenerational equity,” Hope said. This not only means the endowment should keep pace with general inflation levels, but, more importantly, that it should contribute the same amount of budget support in real terms to each generation of new students to Colgate. A Colgate alum, Hope graduated in 1997 when the size of the endowment was in the 200-million range. “We were very underendowed when I was a student,” Hope said, asserting the improve-ments in the endowment fund that have been made in the last 15 years. Colgate endowment is overseen by an En-dowment Management & Finance Commit-tee that advises on financial actions regarding the endowment and the University in gen-eral. Its voting members are all either alums or have some other form of vested interest in the University. “Committee involvement really depends on what is happening in financial markets,” Hope said. “If we are in a period of increased volatility, they will be involved more than in a period when volatility is low.” “We’ve been very happy with the long term,” Hope said. “We managed well through many crises and that bodes well for the future.”

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