Penn's endowment recovers from recession

For Penn’s endowment, the worst of times may be a thing of the past.

After its investments fell 15.7 percent in Fiscal Year 2009, the University’s endowment has come back strong over the past two years.

On the heels of a FY 2010 that yielded a positive return of 12.6 percent, Penn announced at a Board of Trustees meeting last Thursday that its endowment had returned 18.6 percent, or slightly more than $1 billion, for FY 2011, which ended June 30.

Despite the 15.7-percent loss for FY 2009 — which stands in stark contrast to Harvard and Yale universities, whose endowments plunged 27 and 25 percent during that time, respectively — Penn appears to be on the rise.

Last week’s news signaled one thing: with a 4-percent annualized return over the past three years, the University’s endowment has recovered from the financial crisis.

“It’s really helped put us over the top relative to the downturn. A dollar invested in the endowment in 2007 … is now back to its full asset value,” Executive Vice President Craig Carnaroli said. “That is not something I think many of our peers can say.”

But while Penn’s returns over the past three years tell one story compared to other Ivy League institutions, its numbers for the past decade tell a slightly different story.

With FY 2011 having come to a close, Harvard’s annualized investment return for the past 10 years rose to 9.4 percent from the prior year’s 7 percent. While Penn also showed an increase, its 10-year annualized investment return was not as dramatic, growing from 5.6 percent in FY 2010 to 6.8 percent in FY 2011.

Harvard’s one-year return for FY 2011, which was announced Thursday afternoon, was 21.4 percent. Although Yale has not yet released its current numbers, the Yale Daily News reported Thursday that its endowment is “on track” to see a solid, positive return.

In comparison to Harvard’s $32 billion endowment at the end of FY 2011 — which marks the largest college or university endowment in the nation — Penn’s stood at $6.58 billion.

Yale’s endowment finished FY 2010 at $16.65 billion, the second largest in the nation.

“It’s hard to argue with the dramatic success those investment teams [at Harvard and Yale] have had,” said Chris Geczy, an adjunct professor of Finance in the Wharton School and academic director of the Wharton Wealth Management Initiative. “But I think Penn’s substantial strides these past few years have put us in a great position to succeed.”

A work in progress

Kristin Gilbertson, the University’s chief investment officer, is looking to keep that success going.

Gilbertson, who began managing Penn’s endowment in 2004, said there have been “major changes” over the years in the University’s portfolio.

Back in the 1990s, she explained, Penn was still very equity-oriented, with its endowment highly concentrated in areas like value stocks. At the same time, however, peer institutions like Harvard and Yale were cashing in on the boom of alternative investments — including private equity, hedge funds, venture capital and real estate.

“We didn’t have a lot put into private equity, real estate and natural resources back then, and we missed the market a bit there,” Gilbertson said.

In 1998, Penn hired its first chief investment officer, Landis Zimmerman, who began the process of diversifying the University’s portfolio.

Today, Gilbertson said Penn’s $6.58 billion endowment is spread across a variety of investments, with public equities and hedge funds representing the largest asset allocations in the portfolio, at 45 and 25 percent, respectively.

Since Gilbertson began at Penn, the cornerstone of her team’s investment philosophy has been “measured diversification” over an extended period of time, she said.

“We weren’t going to race to catch up [to other schools] in three or fours years,” Gilbertson said. “We were going to pace ourselves over five, six or seven years.”

That philosophy may just be what saved Penn from experiencing a similar collapse to its peers in FY 2009, Geczy said.

While schools like Harvard and Yale had “substantial amounts” of their portfolios invested in illiquid assets — which describe investments that are not easily converted into cash — Penn had “much more liquidity and was much less at risk to dramatic shifts in the market,” he explained.

“If you can deduce from certain indicators how investment opportunities could change over time, it may add value,” Geczy said. “I think Penn was able to read the writing on the wall [before FY 2009] … and that’s why we’re in the strong position we are today.”

Looking ahead

Although Penn steered clear from investing heavily in illiquid assets for many years, the times appear to be changing.

Illiquid assets — which include alternative investments like private equity, real estate and natural resources — currently make up 15.5 percent of the University’s portfolio, Gilbertson said. Her goal is to one day see that number increase to as much as 30 percent.

That benchmark may be due in part to the general trend of success that institutions like Harvard and Yale have experienced with illiquid assets, said John Griswold, executive director of the Commonfund Institute, which conducts research on investment management practices.

“Institutions with larger endowments have been able to look for inefficiencies in the market and exploit them,” Griswold said. By allocating funds to long-term, private market investments, “these institutions are able to combine individual risky assets to achieve higher returns,” he added.

Geczy cautioned, however, that an over-reliance on alternative investments is a “risky move” during a liquidity crisis like the one that occurred in FY 2009.

As it stands today, Gilbertson described Penn’s endowment as “among the most liquid” in the Ivy League.

In order to insulate Penn from any future market volatility, Carnaroli said the University has designed its endowment to cover just 9 percent of the overall academic operating budget. The average Ivy League endowment covers roughly 20 percent of each school’s operating budget, he added.

In FY 2011, Penn used $252 million in endowment funds for operating costs.

Looking ahead, Gilbertson said the University’s emphasis on steady, diversified investing bodes well for the future.

“If you’re going to build your wine cellar, you’re not going to stock it all with 2004 wines,” Gilbertson said. “You can never know what’s going to happen when you uncork the bottle.”

Please note All comments are eligible for publication in The Daily Pennsylvanian.