U. investments lose $40 m. in six months

The data do not include December figures, which push the University into 'pretty average' territory. The month of December spread a bit of "black" holiday cheer to a University budget plagued by red ink, as a $90 million return on investments made up for a $40 million loss in the first five months of fiscal year 1998. The overall $50 million gain constitutes a 5 percent return on investments for the first six months of the 1998 fiscal year, which covers the period from July 1, 1997, until June 30, 1998. By contrast, the University was up by 23 percent at the close of December in 1997, according to Vice President for Finance Kathy Engebretson. During a final Board of Trustees meeting last Friday, Executive Vice President John Fry announced that "unfavorable market conditions" produced a $40 million loss in investments during the first six months of fiscal year 1998, compared to a $142 million gain in investments for the same period in 1997. But Engebretson explained that the University's December return on investments was not available when Fry compiled his report. As a result, Fry's report included only the first five months of the fiscal year, during which Penn actually did post a $40 million loss. University officials were unable to list precise causes for the $40 million loss reported by Fry. Officials also declined to comment as to which stocks, bonds or real estate lost money. "It is difficult to pinpoint the cause of the $40 million loss," Managing Director of Investments Landis Zimmerman said, adding that it is impossible to isolate one stock as the principal culprit. But an analysis by The Daily Pennsylvanian indicated that several Penn stocks were big losers in the last fiscal year. For example, the price of a share in Owens Corning, which produces construction materials, declined 36.2 percent from March 31, 1997, to yesterday. According to filings with the U.S. Securities and Exchange Commission, the University owned 139,739 shares as of March 31. Such a drop in share price would cause Penn to lose about $2 million. Inland Steel Industries Inc., meanwhile, dropped 25.2 percent. Since the University owned 268,314 shares in the company as of March 31, Penn would take a hit of about $1.3 million. But Landis insisted that the $40 million loss is "peanuts" in the context of Penn's multi-billion dollar endowment. And Engebretson stressed that the University is not "any worse off than anybody else." Finance Professor Jeremy Siegel categorized the University's 23 percent return in fiscal year 1997 as "pretty average," adding that most of the market gains occurred in the first half of last year, before the East Asian currency crisis depreciated market values in the summer. The crisis -- which erupted in Thailand and enveloped surrounding countries, including Malaysia, Indonesia, Korea and Japan by October -- significantly depreciated the University's direct Asian holdings and U.S. holdings influenced by the volatile Asian market. The University invests its entire $2.7 billion endowment in equities, bonds and real estate, Zimmerman said. He added that about 44 percent of the available funds are earmarked for U.S. equity, with 10 percent invested in stocks in developed countries which belong to the Organization for Economic Cooperation and Development, and 7 percent invested in non-OECD emerging countries around the world. OECD countries include continental Europe, the United Kingdom and Japan, while Southeast Asia and Latin America are classified as non-OECD regions with growing economies. Penn holds stocks in more than 1,000 international corporations, Zimmerman said. He noted that of the emerging countries, 26 percent of the stocks are concentrated in Asia, including the Far East. This comprises about 2 percent of investments for the University's entire stock portfolio. Highlighting a sample of the University's more substantial investments in Asia, Zimmerman noted that the University invests the most funds, totaling $900,000, in Japanese electronics giant Sony Corp. Penn also holds stock in Japan's Matsushita Electronics Corp. Additionally, Penn holds stakes in Indonesian Satellite Corp. and Korea-based Samsung and Hyundai. Sony's stock price rose 1.5 percent last year, while Matsushita shares fell nearly 25 percent. The other companies are not required to file stock disclosures in the United States. The remaining funds are invested in real estate and fixed-income and high-yield bonds. Fixed-income securities, comprising about 18 percent of total investments, are low-interest bonds with a fixed periodic payment. High-yield securities, by contrast, are "more risky" bonds with higher interest rates, Zimmerman said. In justifying the University's diversified investment policy, Zimmerman noted that the current interest rate for a 30-year fixed-income bond hovers around 6 percent, lower than the potential return on other investments. "We strive to find the right balance," he said.