U. endowment gets hit hard as stock prices fall

Officials expect the fund to bounce back from the $300 million loss, which is 10 percent of its total. The recent market dive that wiped out more than $2 trillion from the value of U.S. stocks has hit the University as well, resulting in a $300 million -- or 10 percent --Edrop in Penn's endowment over a two-month period. University officials confirmed that the endowment -- which peaked at slightly more than $3 billion at the end of June -- fell to about $2.7 billion at the end of August. Though exact figures were not available, officials attributed most of the loss to across-the-board declines in stock prices. But despite the recent drops, Penn officials say they are not concerned about the endowment's strength and are not planning any changes to their investment strategy. "We try to stick to a long-term policy that will provide the best risk and return for the endowment," Managing Director of Investments Landis Zimmerman said. "What happens month-to-month or quarter-to-quarter really doesn't have much of an influence on long-term policies." Harvard University announced yesterday that it, too, suffered a 10 percent drop in its endowment, which was valued at more than $13 billion at the end of June, the highest of any U.S. institution of higher education. Prompted by economic turmoil in East Asia, Latin America and Russia, U.S. and international stocks fell sharply in July and August. As of August 31, the Dow Jones Industrial Average had fallen 19.3 percent from its July 17 high of 9,337.97. The Standard & Poor's 500 index, a group of several hundred prominent stocks, also fell by 19.3 percent. The technology-laden NASDAQ index plummeted more than 25 percent in the same six weeks. Penn Vice President for Finance Kathy Engebretson emphasized that the endowment has begun to recover its losses thanks to the market's strong September performance. Even with yesterday's 152-point drop, Dow stocks still closed above 8,000, up from a year-low of 7,539 at the beginning of the month. As of July 31, the University had 42 percent of the Associated Investments Fund -- the main portion of the endowment -- in domestic stocks, 10 percent in international stocks and 5 percent in stocks from emerging markets. The University's long-term allocation strategy calls for 50 percent of the endowment to be in domestic stocks, but with the recent market downturn, the percentage of the endowment invested in U.S. equities fell from 42 percent on June 30 to 38 percent earlier this month. At their September meeting, the University's Board of Trustees used the endowment's large cash reserves -- at that point adding up to more than $200 million -- to bring the amount of U.S. stocks in the endowment up to 40 percent of the fund's total. T. Rowe Price Associates Vice Chairperson James Riepe, who replaced John Neff as the head of the Trustees' Investment Board over the summer, agreed with Zimmerman that the recent stock market downturn did not dampen their forecast on equities. "We really look at the endowment in a long-term basis," he said. "It's not something that changes our outlook in the short term." Zimmerman emphasized that the University put more money into the volatile stock market not in an attempt to buy shares "cheap," but rather to "rebalance" the endowment's diversified portfolio. "You don't want to make shifts into the flavor of the day," he said. Penn Finance Professor Jeremy Siegel, a nationally known stock-market expert and author of the bestselling book Stocks for the Long Run, praised the University's strategy. "It was good that they were able to buy [stocks] at lower prices," he said. "If you're looking at the long term, stocks are still the best." Zimmerman said his office does not track the endowment's individual stock holdings -- which are managed by several teams of outside managers -- instead focusing on the endowment's overall performance. But several of the stocks known to be held by the University earlier in the year have dropped significantly in the recent market downturn. Owens Corning, Inland Steel Inc. and Sony Corp. all dropped more than 30 percent in August from their mid-July highs. However, several others -- including Philip Morris Cos., RJR Nabisco Holdings Corp. and Unocal Corp. -- fell by 10 percent or less over the same period. And Siegel warned that the worst may not have passed for the stock market. "In the short term, we're in for a rocky ride for the coming weeks and months," he said, noting that the volatility in emerging markets could have a large effect on stocks in the coming year. Siegel added that he expects stocks to head back down before reaching their former heights, though he said "no one can predict when the market will bottom and go back up." Zimmerman said the key to the endowment's growth is not necessarily the mix of stocks in Penn's portfolio, but how much of the endowment is in equities and fixed-income securities. Equities include stocks and high-yield bonds, while fixed-income securities such as investment-grade bonds have a lower return but are much less risky. Harvard's endowment during the first 2 1/2 months of fiscal year 1999 -- which began July 1, 1998 -- has seen a drop of approximately $1.3 billion, according to the annual report of the Harvard Management Co., which runs the school's endowment. "You have to think of a university endowment in biblical terms," Harvard spokesperson Alex HuppZ said. "Harvard takes a very long-term [approach] on its endowment." The report noted, however, that there is a "possibility that things will get worse before they get better." Even though they have equal percent losses this fiscal year, Harvard is still outperforming Penn's endowment in the long term. For fiscal year 1998, Harvard's endowment jumped 20.5 percent, compared to Penn's 13.3 percent. Over five years, Harvard's went up 19.6 percent annually, while Penn's averaged 15.2 percent.