U. endowment lagging behind market growth

Officials are planning a more aggressive strategy to combat low returns. Although the University's $3.19 billion endowment still ranks 12th in the country, Penn's investment portfolio has significantly lagged the market averages for the past two years, raising concern among the University's top financial officials. "No one is satisfied with the performance," said University Trustee Richard Worley, who chairs the committee that oversees management of the endowment. "This is a major setback -- a very disappointing result." In response to the weak performance, officials say they are planning a more aggressive growth strategy for Penn's investment portfolio -- a dramatic change from the conservative deep value orientation that Penn has held for more than 20 years. The endowment's poor performance -- including losses over the past six months totaling almost $80 million -- could have significant consequences for Penn's budgets over the next several years, University President Judith Rodin said. Over the past year, the total value of the University's investments has grown just 9.8 percent, while the S&P; 500 and other broad market indexes have been averaging increases of between 17 and 20 percent. According to figures from The Chronicle of Higher Education, the average college endowment grew by 11.6 percent last year. Harvard University has by far the largest university endowment at more than $14 billion, followed by the University of Texas system and Yale University. While Penn's has a 12th place ranking, it masks a low per capita ranking on account of the University's large student body. Penn now has about 50 percent of its portfolio in stocks, about 20 percent in bonds and about 15 percent in private equity and venture capital. Another 15 percent is invested in diversifying assets, such as real estate. "We don't have our heads in the sand," Chief Investment Officer Landis Zimmerman said. "There is a movement to the broad market and a shift away from our deep value bias." Despite the recent trend to invest in dot-com and Internet firms, Penn has eschewed investment in the high-flying technology sector, instead choosing to invest in more stable value stocks, blue chip companies such as Walmart or IBM. A policy of more aggressive growth could yield higher returns, but it brings with it greater risk. According to Zimmerman, in the past few months the University has increased its previously limited broad market holdings -- such as Wilshire 5000 index funds -- so that Penn now owns more small and mid-cap stocks, which have performed better this year. Broad market funds now account for about $400 million, or approximately one third of Penn's domestic stock holdings. Over the past several months, Penn has also reduced its portfolio of value stocks -- heavily weighted in the U.S. market -- by around $567 million. Investments in growth and international stocks have increased by $193 million during the same time period. And following a nationwide trend for colleges and universities, Penn has begun to move away from the safety of bonds and into the riskier private equity and venture capital markets, which typically offer higher investment returns. But perhaps the most significant change has been the replacement of two of its six independent investment managers with new ones who are more growth-oriented. "We picked a number of managers based on past prior performance and some of those managers underperformed," Rodin said. Still, many of Penn's current problems are as much rooted in policies institutionalized by Penn's former endowment manager John Neff as they are in the present. Widely regarded as one of the greatest investors of all time, Neff chaired the Trustee's Investment Board from 1979 to 1998. He volunteered to single-handedly manage the University's entire endowment, free of charge, and did so for all but the last few years of his tenure. In nearly 16 years, he took the fund from a paltry $200 million to more than $1.7 billion. Outside managers were brought in 1995, but they largely shared Neff's long-term, value orientation. Over the last few years, however, that approach has been less successful. As high-technology and Internet stock prices soared over the last two years, the value stocks which Neff championed trailed the market. "Value investing goes in cycles," Zimmerman said. "Sometimes it's great. Sometimes it's less good." Penn's historically deep value-bias has also hindered its involvement in private equity, venture capital and buy-out investments. Schools from Stanford University to Williams College have boosted their returns by entering these newer, riskier investment markets. But Penn has remained relatively underexposed, Worley said. And according to University Vice President for Finance Craig Carnaroli, Penn's limited involvement has caused it to miss out on a number of highly successful ventures and get locked out of others. "When you look at the the high returns our peer institutions are earning over the past few years, it is probably due to their early entry into the private capital markets," Carnaroli said, noting that there are now more institutional dollars chasing those investments than ever before. "A lot of [venture-capital] funds are now closed off," he added. Others now, he said, are restricting the amount of capital Penn can invest.