STAFF EDITORIAL: Investing for Penn's future

The decision to pursue more aggressive investments for Penn's underperforming endowment is long overdue. But recently, relative to the endowments at other peer schools, Penn has been ailing. While the average college endowment increased 11 percent last year and 18 percent the year before, the University has been mired over the last two years with paltry single-digit returns. This makes the administration's decision to pursue more aggressive investment opportunities welcome, but also conspicuously overdue. In 1979, University Trustee John Neff -- one of the greatest institutional investors of the last two decades -- took over operations of Penn's endowment, which had been among the worst performers in the nation. He was guided by a value philosophy of investing, which called for buying companies with solid fundamentals that deserved to be priced higher than they were. And for nearly two decades, despite the low-risk strategy, the returns were spectacular. As recently as three years ago, after day-to-day control of most of the endowment had been passed onto outside managers, Penn earned more than 20 percent on its endowment. But today, investors from Wall Street to Main Street have become increasingly aware that a new risk-return calculus is at work. A new investment paradigm is in place and those value investors who were too slow to react -- the University included -- have suffered mightily as a result. Penn's new strategy will not see the endowment's stock portfolio filled with names of promising but unproven dot-com companies. But Penn will now enter, slowly, the private equity and venture capital markets that have already paid high dividends for many of our peer institutions. This strategy brings with it a little more risk, but we feel these risks are acceptable given the likelihood of higher returns. The University has been investing money for more than 240 years, and rightly takes a long-term perspective. But with as fundamental a shift as we've seen in market dynamics over the last two years, a new way of investing is definitely in order.