|The Long Haul|
Financial news during prosperous times is a ho-hum affair. Who wants to read another story about how good things are? Nothing attracts coverage like losing money, however, so in August, when a hedge fund called Everest Capital lost $1.3 billion during a 13 percent dip in the Dow, newspapers from the Wall Street Journal to the Brown Daily Herald reported that Brown, along with Yale and Emory University, was among Everest's unfortunate investors.
But what did the dip really mean for Brown? In good economic times such as these, it's easy to forget that investment decisions are a tricky business. Put all your money into a savings account when interest rates are low and you lose a chance to make a killing on the stock market. Put all your money in the stock market and you risk losing it when Wall Street turns bear. Most investors cope with this dilemma by doing a combination of both; the trick is deciding how much to put where, a decision based in part on how long you want to tie up your money.
When it comes to a university endowment, the investment horizon is forever. Brown's $1.1 billion endowment requires safe, proven investments to guarantee its stability. But if a university takes an overly cautious approach and fails to keep up with the rate of inflation - a particular concern with dollars that are intended to sit unspent in perpetuity - its endowment will lose spending power. Keeping Brown's endowment healthy means keeping it growing, says Executive Vice President for Finance and Administration Donald Reaves. And that's exactly what the University has done since 1984, the last time the endowment showed a net loss over the course of a fiscal year. Since then, Reaves says, the average rate of return on the endowment has been more than 13 percent. Over the last three years, investment performance has been plus 18 percent.
So how do you invest an endowment to take maximum advantage of bull markets without taking on too much risk? According to Reaves, underlying Brown's investment strategies is the fundamental principle that the money needs to exist, and thrive, in perpetuity. "If you're ranking [our] goals in order of priority," he says, "number one would be asset preservation, followed by appreciation. That's a slightly different approach than the one high-wealth individuals would take to being in the market. They're looking for appreciation first. We're looking for asset preservation." This approach, he adds, means a slightly different risk-reward ratio.
"We have a big, big portfolio," says John Shear, an assistant vice president and analyst in Brown's investment office, and this means lots of opportunity to protect the entire portfolio by diversifying it. Balancing growth with the need to maintain a secure base means splitting the endowment into a number of individual investments of varying risk. "You're not going to be able to grow anything over time without taking some types of risk," Shear says. "What you want to do is be able to figure out how much risk you want to take."
Because Brown, as an Ivy League school, has relatively high visibility and more than 70,000 smart and opinionated alumni, managing its endowment is something of a high-wire act: lots of people are very interested in every decision - and possible misstep - the University makes. Coming right after the failure of Long-Term Capital Management, a hedge fund that required a $3.6 billion emergency bailout package, the decline of Everest Capital's value from $2.7 billion to $1.3 billion was reported with unusual alacrity. The story was featured on CNN, and written up in The Chronicle of Higher Education and the Wall Street Journal.
The University was involved with two Everest funds, Shear says: an international fund and an emerging-market fund. The real trouble - for Everest and many other investment companies betting on emerging markets - turned out to be the collapsing Russian economy. A statement by Marko Dimitrijevic, founder of Everest's Capital Frontier Fund, summed up the reason for Everest's failure: "The magnitude of the losses on the Russian debt and the speed at which they occurred were something that I have never encountered since I began working in professional money management seventeen years ago."
The Brown Corporation's investment committee, which picks the individuals and companies that manage the University's endowment, selected Everest for the same reason it chooses any investment partner: the fund, when selected, had a great track record. Unfortunately, that record hasn't continued. But despite Everest's losses, and long-term Capital's collapse, the problem is not with hedge funds per se, Reaves notes. Other hedge funds that Brown has invested with have resumed making money since the Dow's August decline.
The lessons for Brown are the same as those for any long-term investor: protect yourself with diversity in your portfolio, and don't panic. The temporal scale for endowments, after all, is geological. For financial overseers such as Reaves, August was a nanosecond in the longest investment timeline imaginable. In 1987, he recalls, the endowment stood at $359 million. One capital campaign and eleven years of investing later, the total is $1.131 billion.
"One month is not going to make or break Brown's endowment," Reaves says. "We're looking at the performance of that endowment over the 234-year history of the University and going forward into perpetuity. Over time, our investment goals have been achieved."