At least one group of high-powered investors appears to be holding true to industry doctrine and not selling into a panicked market.
US endowment funds, many just as bruised by the downturn in financial markets as rank-and-file investors, are staying the course as they strive to ride out the storm, according to industry insiders. Most of these money managers, who control about $411 billion in assets invested for the long term, instead see opportunities in overseas markets, real estate, and private equity -- all sectors hit hard in the recent wave of stock and commodity market crashes.
“We continue to advise our clients that they have to be careful not to be swayed by market volatility and the dramatic changes that have been going on. We have not sold anything and we don’t view that our clients are in that position,” said Keith Luke, managing director, at CommonFund, a Wilton, Connecticut-based money manager that invests around $40 billion in endowment and foundation money. “Certainly there is great concern about the declining value of endowment portfolios, but at the same time, since they are long-term investors, they realize that selling at distressed prices in this market would do long-term harm to the value of their portfolios.”
The latest CommonFund survey for fiscal year ending June 30, 2007, showed that 23% of endowments’ allocations were in US stocks, 12% in fixed income, 20% in offshore equities, 42% in alternatives including private equity, hedge funds, and commodities, while 3% were in cash. Luke said that so far, based on initial data for CommonFund’s 2008 study, he hasn’t seen a great deal of allocation shift.
But he noted that with steep market declines, allocations of the fund’s endowment clients will look different. “Still I get the sense that you will not see a lot of dramatic changes. Certainly investors will make sure they get paid a premium for the risk they are taking ... but that doesn’t mean they’re going to make drastic shifts in their portfolios.”
WINNERS IN A BRUTAL YEAR
US endowments and foundations took a beating in the latest fiscal year ending June 2008, with the one-year median performance showing a 4.70% loss, said Wilshire Trust Universe Comparison Service, which looks at endowments and foundations worth $1 billion or more. Average endowment losses were 3.04%. There were out-performers, however -- the likes of the $36.9 billion Harvard endowment and $22.5 billion Yale fund -- which managed to post positive returns of 8.6% and 4.5%, respectively, in 2008 despite a plunge in US and international stocks.
Some analysts said these institutions benefited from alternative investments that don’t mark to market on a daily basis. A lot of the bigger endowments have invested in assets that are valued at the end of the calendar year such as private equity and real estate. So losses in these assets will not be reported until the end of the next fiscal year in June 2009.
Dartmouth College’s endowment, meanwhile, posted a fiscal 2008 gain of just 0.5% in assets to $3.7 billion -- down sharply from the 5% it had expected. In 2007, its endowment grew 21.6%. Although Dartmouth’s three-year return was still a robust 12.8%, the college has cut its estimate of the fund’s performance in 2009 to 5% from 10% previously. Dartmouth’s chief investment officer David Russ, quoted in the campus newspaper Vox, said his team manages the endowments with a long-term focus. “We are not day traders,” he told Vox. “The portfolio is well-diversified over multiple asset classes and that ... reduces the risk to total portfolio over time.”
Pepperdine University’s chief investment officer Jeff Pippin echoed Russ’ sentiment. With an endowment totaling about $800 million, Pippin emphasized that short-term gains are not the fund’s priority. The university’s long-term real return target, he said, is 5.5% over a 10-year period. “Over time, we want to maintain the purchasing power of our fund,” said Pippin, who spoke at a recent US endowment conference in New York sponsored by Argyle Executive Forum. “Our processes ... aim to maintain inter-generational equity. The dollar value of our fund is going to fluctuate and we’re going to see volatility over short periods of time.”
But the important thing for Pepperdine’s endowment, he added, is not its dollar value or how it compares with other funds, but how it supports the university’s current operations and future needs. Pepperdine currently has a 45% allocation to alternative investments, but it’s not quite there yet, Pippin said, because “we’re actually under-allocated to private equity even though we have a target that’s about 4% higher.”
ALOHA, RETAIL REAL ESTATE
In Hawaii, real estate is a potential sweet spot for Kamehameha Schools, a private entity with an endowment of $9.4 billion. The institution is looking at opportunities in the commercial property sector such as office space and retail stores, said Kirk Belsby, vice president for endowment. “What we see are values particularly in real estate, with the retail sector coming down ... kind of bottoming out, kind of 15% less, if you will, by mid-2010,” said Belsby, who oversees an endowment that is the single biggest land owner in Hawaii with assets of about $3 billion. “As an investor, where do I go? California, Nevada, Arizona offer the greatest opportunities, but that’s only because that’s where the biggest debacles were in residential ... I think retail (will) be the more opportunistic play.”
Like all other endowments, Kamehameha Schools’ fund has been hit by the upheaval in financial markets, industry observers said, including holdings in more than $2 billion common and preferred stocks. Overall, what gives most of these endowments some comfort in this uncertain environment is the belief that over a period of time, returns revert to their long-term average.
“Every bubble, whether you’re talking about Japanese stocks, or gold ... retreats basically 100% over time,” Pepperdine’s Pippin said. “So we have to constantly guard against the temptation to base decisions on extrapolating market returns from short periods of time.” (Reuters)