With assets surpassing the $150 bn mark, university and college endowment funds have left the stodgy old days of bonds and cash far behind. Today these investors are heavily weighted in stocks as well as alternative investments.
Finding the largest of the funds is easy; there is great disparity in wealth among schools. According to a 1997 study of nearly 500 major college and universities in the US conducted by the National Association of College and University Business Offices (Nacubo), the top 79 schools held 70 percent of total assets under management. Of these, only 25 had assets greater than $1 bn. While this simplifies the targeting of these funds from an investor relations standpoint, the more difficult task is discerning which funds are actively steering their own investment decisions.
Standard & Poor’s money market directories database shows that 368 schools maintain some form of in-house management capabilities, according to data provided by the universities themselves. The top 58 of these endowments represent an aggregate asset pool of over $123 bn.
Farming it out
The problem is, almost none of the 368 institutions manage their assets internally through active stock selection. They set asset allocation internally and select outside investment advisors. So although these funds are an attractive market for pension plan consultants and a deep pocketed pool of potential clients for investment management firms, they are not making their own buy and sell decisions.
Barely a handful of university endowments actually maintain their own investment staffs. The easiest way to identify them is to check which ones are filing a 13f with the SEC, the required quarterly filing for any institution with equity investments over $100 mn. According to The Carson Group, seven university endowment funds were doing so in 1998, a far cry from the 368 schools tracked by S&P.
Based on asset size, only three of the seven endowments boast the resources to register on an IRO’s radar screen. Harvard Management Company, Harvard University’s endowment investment arm, manages roughly $13 bn based on mid-1998 figures. The University of Texas Investment Management Company (Utimco), modeled after Harvard’s investment management company, oversees some $11 bn in assets. The University of California’s treasury office manages just over $33 bn in endowment and university employee pension assets.
The other four endowments are either no longer internally managing their assets or are filing for relatively small amounts. The Massachusetts Institute of Technology files for $169 mn, all of which is indexed, with the remainder of the $3.6 bn endowment externally advised. The University of Chicago files for less than $25 mn. Both the University of Pennsylvania and the University of Delaware employ outside advisors.
Primary players
Bill Goldsmith, an associate director with Carson, agrees that from a stock surveillance standpoint, Harvard, UC, and Texas are the three primary players in terms of internally managed endowments, although most of the activity comes from UC and Harvard. ‘The University of Texas is not nearly as frequently seen,’ he adds. Of its $11 bn Texas’s Utimco allocates over 85 percent of its assets to outside advisors, leaving its three full-time investment professionals managing $1.2 bn.
Together, Harvard and the University of California manage a combined $10 bn in endowment equity investments. Harvard Management Company employs 180 investment professionals, while UC employs a staff of 18. David Levine, a Carson Director, describes both schools as savvy money managers which actively research the stocks in which they are investing. ‘California has less of a budget, whereas Harvard travels and comes out to meet. But California does the conference calls and everything else. We treat them both like any other institutional investor of their size.’ He notes that when UC was a major shareholder of one of his clients, the company spoke regularly with the fund and made a point to visit on trips to northern California.Though both UC and Harvard are active investors, their portfolios are starkly different. UC has a low turnover of 15 percent and a portfolio of just over 100 stocks. Harvard owns over 1,500 stocks with a turnover of 83 percent.
For Chuck Triano, director of investor relations at Bristol-Myers Squibb, UC represents the type of investor companies look for when promoting their stock. ‘We meet with them a couple of times a year. They’re the type who hold on for the long term, so you’d love to get them in.’ Triano describes the investment staff as strong researchers knowledgeable in their areas of expertise. ‘The analyst from the University of California came in and she knew our sector and our company, and she had some good, well thought-out questions.’
Fee reduction
Patricia Small, treasurer for the University of California, points out that fees are dramatically reduced when management is kept in-house. Although more schools are spinning off their investment staffs into separate entities, including Duke, Princeton, Yale and Stanford, in addition to Harvard and the University of Texas, the move does not signal a decision to bring stock selection inside. Instead, the shift represents a greater concern for monitoring outside advisors, particularly following the collapse of certain hedge fund shops, most notably Long-Term Capital Management, which exposed several endowments to sharp losses.
Sheldon Steinbach, general counsel for the American Council on Education, which represents 1,800 public and private universities, agrees that the overall trend has been to direct assets to outside managers. ‘More and more schools have realized, certainly over the last decade or so, that employing external financial advisers to manage an endowment is by far the best means of ensuring the greatest return and sophistication in managing the endowment.’ Outsourcing, he says, ‘seems to be increasingly the common and appropriate way to do it.’
UC’s Small sees the question of internal investment management versus external advisors differently. She believes returns from the market will fall, so universities will have to control fees more vigorously. One way this can be accomplished, according to Small, is to consider in-house management, a cheaper alternative to external management.
As to the question of staying competitive in terms of salaries, an issue which has led to many funds losing key professionals, Small points out the differences between Harvard, which internally invests in a number of alternative asset classes and is a much more aggressive trader, and UC. ‘For what Jack Myers [president of Harvard Management Company] does, maybe they have to pay up for those types of people. We’re not looking for high profile, big ego people.’ She adds that UC’s investments are less sophisticated, focusing primarily on common stocks, a strategy that does not require them to have a large staff or a great amount of technology.
One possible outcome is that funds could begin to manage core, domestic equity portfolios themselves to reduce costs, leaving the more complicated strategies to external advisors. Thomas Ricks, president and CEO of Utimco, notes that his firm plans to continue its internal strategies, with a focus on core equities. ‘Our in-house management revolves around more of the typical large cap efficient markets, such as large cap growth and income.’
Both Utimco and UC hire external advisors for the more specialist mandates, such as emerging markets and private equity, and even Harvard has recently spun off its private equity group to form a separate, privately-owned, for-profit institution.
As endowment assets continue to grow, more schools will have the resources to experiment with in-house management, should the need arise to offset the possibility of falling performance, or in some cases, simply the difficulty in finding outside advisors to oversee such a significant pool of assets. But at present, few schools seem to be considering such a decision, and for now investor relations officers have a simple task in keeping tabs on such a small community of investors.
