The endowment blues

Last year was a banner year for college endowments. Harvard increased 32.3 percent. Yale soared 41 percent. Princeton went up 35.5 percent. Duke skyrocketed 58.8 percent. The combined value of these four endowments increased $10.75 billion. And the University of Pennsylvania? In the best year in history for institutions of higher education, in the midst of a booming economy, it lost 1.8 percent, or about $60 million, continuing a recent pattern of underperformance. Over the last year, it fell from the 12th to 18th largest endowment in the country, and on a per-student basis, it isn't even in the same league as its peers. The University dropped the ball, and it did so in a big way. In 1979, former Investment Board Chairman John Neff inherited a woefully small endowment. Following a "value" philosophy, which emphasizes stocks undervalued by the market, he gave Penn one of the best-performing portfolios of the 1980s and early '90s. The salad days of value investing ended in the mid-1990s, replaced by the emergence of growth stocks, which as their name implies, augment shareholder value through continued earnings growth. The big-name media and technology stocks of our generation -- Time Warner, Intel, America Online -- all fall into this category and have rewarded other schools quite handsomely. Many schools also entered the venture capital markets early, yielding impressive results. Twelve of the top 20 schools for which data is known returned more than 30 percent on their endowments last year, largely on the strength of their VC holdings. Certainly, none lost money. All the while, the managers of Penn's portfolio were stuck in the past. Like Galileo's inquisitors, who insisted the earth stood at the center of the universe, they have clung to their trusted -- but fundamentally obsolete -- model of the investment universe. Recognizing its folly, Penn now plans to move aggressively into growth stocks and alternative investments, but the fact is it may be too late. Penn missed out on unprecedented growth in the stock market and will suffer as a latecomer to a sated VC market. And as a result of this short-sightedness, future generations of Penn students and faculty will suffer. We recognize that the men and women who manage Penn's endowment work for -- or in some cases, run -- some of the largest investment banks and brokerages in the country. But if they produced these returns for their clients in the midst of the greatest prosperity this country's investors have ever known, there's no doubt they'd be out on the street in no time. In a recent memo to his fellow Trustees, current Investment Board Chairman Howard Marks wrote "We wish we'd invested in venture capital.... We wish we'd invested more in growth stocks." Us, too.

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