Penn endowment loses money despite an economic upswing

Despite the extraordinarily high returns of the endowments at peer institutions recently, Penn's endowment posted a highly disappointing 1.8 percent loss for Fiscal Year 2000. Penn's endowment sits at about $3.2 billion. While that is one of the largest in the country, when measured on a per-student basis, it is one of the lowest among Penn's peer institutions. The drop can be largely attributed to two factors: Penn's historical preference for "value stocks" and a lack of alternative investments, such as venture capital or buyout investments. Alternative investments practically doubled endowments at other schools, including Yale, Harvard and Princeton universities. "Fiscal 2000, we were miles behind some of our competitors because they had exposure to venture capital and we didn't," Investment Board Chair Howard Marks said. "Venture capital had a level of performance that was unprecedented." Value stocks are those purchased simply because of their low price, not because of the company's potential for growth. In the past several years, the market has favored venture capital and growth and technology stocks in favor of the value-based investment of the University. "We were value when the market was growth," Vice President for Finance Craig Carnaroli said. But Penn has spent the past several years developing a new long-term plan for the endowment to reduce its reliance on value stocks. The plan calls for investing 50 percent in stocks, 15 percent in excess return assets like venture capital and buyouts, 15 percent in diversifying assets and 20 percent in bonds. According to Chief Investment Officer Landis Zimmerman, Penn has been moving toward this goal for a couple of years. "We're pretty close. We think within the next fiscal year," Zimmerman said. He added that Penn has moved around $1 billion in assets in the past few years. Still, Penn was drastically outperformed by its peers in the last fiscal year. For example, Notre Dame's endowment skyrocketed by almost 60 percent in FY 2000, and Harvard brought its already large endowment to $19.2 billion dollars with a 32.3 percent return. Notre Dame and Harvard aren't alone, either -- the majority of the wealthiest 25 schools in the nation saw double-digit increases in their endowments in FY 2000, according to figures published in The Chronicle for Higher Education. Penn just simply didn't have the types of investments that led to the growth its peer schools experienced during this time. "We are never going to recoup that period of private equity payout," University President Judith Rodin said. Penn's value-bias stemmed from a period of exceptional growth in the 1980s and early 1990s under the leadership of John Neff, whose investment style centered around value stocks. And for around 15 years, the strategy worked great for Penn. "Why change the horse that's been working for you?" Carnaroli said. "You can't fault us for sticking with what works." While Penn has since changed its investment structure to accommodate the volatility of the market, Carnaroli said that these benefits will not be seen overnight. "We're not likely to see the benefits of the private equity for a period of time," he explained. "In the long run, Penn's endowment will be better off." Marks cautioned against looking at the market performance in the past year and running out to reinvest the endowment in technology growth stocks. "It'd be folly to do it all today and have a representative proportion in growth stocks and then have them collapse," he explained. "Having lost the money that could have been made in growth stocks and venture, the worst thing would be to move into them now and participate in their fall to earth," Marks said. "That would be the worst thing imaginable." Instead, the goal of the broader, less value-dependent plan is to secure Penn's endowment so the ups and downs of the market won't hit as hard. "If things continue to soar like they did last year, we're not going to be in the vanguard," Marks said. "But I don't expect that to be the case. If things collapse, we're going to be definitely above average." University Trustees Chairman James Riepe added that last year's poor performance should be taken in the context of the endowment's overall long-term performance. "If you look at the 20-year numbers, we are still well ahead of many of our peers," he said. "The investment business is a long-term business. We don't look at it on just a one-year basis."

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