University Finances: Penn's finance strategies mirror top competitors'

Outside financial experts agree: Penn's Office of Investments is certainly on the right track.

The University's endowment returned 20.2 percent growth on its investments this past fiscal year, bringing the grand total to $6.6 billion.

This positive growth reflects strategies that Penn's prime competitors, Harvard and Yale universities, have been using for years: an emphasis on international equities and a slow increase in alternative investments.

Harvard's endowment is currently $34.9 billion, and Yale's was $18 billion as of 2006 - it has not yet released this year's returns.

Experts agree that these schools' strategies are the right ones - as long as they're done wisely.

"All these leading endowments look for real diversification," said Derek Braddock of Higdon Partners, an asset-managing firm in New York.

"They tend to try not to be overweighted in any hot sector or strategy and keep a mantra of consistent returns," Braddock said.

This diversification can be achieved in a number of ways, but balancing domestic investments with international ones and moving toward a larger allocation of alternative investments - like hedge funds, natural resources and real estate - are strategies that Penn is currently pushing.

"The more sophisticated institutional investors are moving more toward international investments in general," Finance professor Richard Marston said.

International investments can also serve as protection from economic troubles on the home front.

"If the U.S. has a recession, maybe Europe doesn't catch it," Chief Investment Officer Kristin Gilbertson explained.

Emerging markets, in which Penn invests about 5 percent of its portfolio, are finally getting more attention from smart investors, Braddock said.

Local economies are "becoming more global players, and they often times have markets that have yet to be tapped," he explained.

And while Marston agreed that Penn's 5 percent allocation "makes a lot of sense," he cautioned against going much further beyond that.

"Some investors have gone overboard in terms of emerging markets" and may not fully understand the volatile nature of emerging market economies, he said.

As for alternative, non-equity investments, Marston sees great benefits in diversifying in that direction, referencing Yale's particular strength in assets like hedge funds.

"What the institutional investors have tried to do in universities is to diversify their risk by going into markets that aren't highly correlated with traditional stocks and bond markets," he added.

By investing in asset classes that aren't associated with the ups and downs of the daily market, universities can generate returns even when the market is weaker.

Braddock sees these alternative investments as a great source of growth in today's market and a necessity for endowment investors.

In the meantime, Penn has been doing just that, with a five-year plan to slowly increase allocations in real estate and natural resources.

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