Keeping your endowment investments steady: if the recent market machinations have shredded your college's investments, it's time to re-examine your school's strategy - Statistical Data Included

Matrix: The Magazine for Leaders in Education, Sept, 2001 by Judith Harkham Semas

Today's financial markets are so dicey--evidence this year's crash of last year's high-flying technology stocks--that education professionals with financial investment responsibilities should reevaluate their strategies and make responsive changes, shouldn't they? Not so fast, say experts. Major or minor changes may not be needed if those professionals already have in place a sound, written investment policy and asset allocation plan that specifies in detail the institution's investment goals plus the levels of risk it is willing to assume to achieve those goals.

"The key is to develop a solid, well-thought-out investment strategy," says Tom Pair, Atlanta office investment director for CIBC Oppenheimer, a New York-based firm that researches and manages institutional investments. "You want a policy that can withstand even severe market changes such as those we've seen this past year. And if your strategy didn't work out, then it probably wasn't as well drafted and considered as it should have been."

So what makes for a sound investment policy? According to Pair, the first consideration is always what near-term, intermediate and long-term liabilities the foundation has for the funds it receives. Those liabilities will dictate the liquidity/maturity factor in the policy.

"Some of the information that gets you to this mindset includes who is governing this pool of money? A board of directors, a single person or several people? You need to isolate who has what responsibilities and whether they are managing themselves or delegating that function to a consultant," he says.

The policy should always specify investment goals in of expected ranges of return, and it should specify acceptable risk levels in terms of acceptable types of investments.

"First you try to devise a plan of diversified investments that emulate or adhere to your chosen risk levels; next you hone in on return," he explains. "And then you try to find managers and/or securities that will satisfy your strategy by recommending specific investments that conform to your plan."

A sound investment policy seeks to identify the optimal mix within the range of acceptable risk between stocks and bonds, international and domestic instruments, small-cap, mid-and large-cap stocks, growth and value vehicles, and so forth. (Small-cap stocks involve investments in companies with capitalization of less than $500 million; historically these tend to have greater deviation from their average return and thus are considered higher-risk than mid-cap and large-cap stocks.)

FINDING THE RIGHT AMOUNT OF RISK

Normally, one would expect endowments to be totally risk-averse in their investment policies, but Pair points out that is not always the case. Certainly, the ultra-large endowments do not invest so conservatively.

"Harvard is the largest endowment out there: $17 to $18 billion dollars," he says. "And they have invested in private equity, which is historically very risky. Frankly, they have every safe and every risky investment you could ever imagine. Because of their size, they have the leverage, in-depth staff capabilities and discretion to invest aggressively, and they have their sights set on bigger things."

But you don't have to have a billion-dollar fund to handle a more aggressive stance, according to Pair. "At one southern university, a very dynamic, young, able investment director of an endowment grew it from about $20 million to just under $200 million during his 12-year tenure from the 1980s to the early '90s," he points out. "And he wasn't achieving those results on bonds and large-cap stocks alone."

Pair feels that the City College of New York has "probably the utmost cutting-edge portfolio of its size--approximately $4 million--out there. CCNY has incorporated several asset classes that most institutions with a similar level of assets don't seek or even have access to. But, they have their sights set on a much bigger endowment and they have relatively few liabilities."

Darryl Butler, deputy to the vice president for finance and management, detailed CCNY's policy on investment categories (see "City College of New York Asset Allocation Plan 2/13/01"). Although the asset categories have specific initial target allocations, acceptable ranges have also been determined to allow the flexibility needed for changing opportunities and market conditions: 0 percent to 5 percent for cash investments, 32 percent to 55 percent for fixed income vehicles, 30percent to 50 percent for equities and 0 percent to 15 percent for alternative equity assets.

"We have diversified broadly so that we can ride out market storms," Butler says, "We use alternative equity investment--the Whistler Fund through CIBC Oppenheimer--as a neutral market vehicle in that it is less subject, historically, to the ups and downs of the market."

PRESERVING PRINCIPAL

California State University, on the other hand diversifies its $250 million to $300 million fund for miscellaneous fees and income only among such highly secure fixed-income assets as treasuries, governmentals and the like. "Preservation of principal is at the top of the list of our investment priorities for these relatively short-term funds," says Executive Vice Chancellor Richard West. "We're prohibited from doing equities; you wouldn't with this kind of pool, anyway. Our investment goals are pretty narrowly targeted."