Endowments see trouble on the horizon

With a bear market on the horizon, Penn's endowment has spent the last few months gaining back the millions lost in the last Fiscal Year. But for Penn's peers, the recent downturn in the economy could mean losing a hefty portion of recent dot-com stock-fueled gains. Penn, which did not invest heavily in high-risk equities like technology stocks and venture capital, lost 1.8 percent of its endowment for FY 2000. Some of its peers, like Harvard and Duke, posted double-digit endowment increases for that same year. "Penn actually hasn't been hit by the recent downturn because of technology stocks and the weakness in the sector," University President Judith Rodin said. With the tech-heavy Nasdaq down 40 percent from its high and pessimistic economists hinting at a future recession, experts are saying these record-breaking gains seem overinflated. And Penn, which originally caught criticism for missing out on technology stock success and sticking with its historic value orientation, may end up in better shape than its peer institutions. Jeffrey Hooke, Wharton alumnus and managing director of the Virginia-based investment banking firm Hooke Associates, predicted that universities which invested heavily in tech stocks will be slammed by the Wall Street sell-offs. "Clearly the universities that went deep into the stock market are going to be hurt," Hooke said. Penn's investments have traditionally been heavy in the so-called "value stocks" -- or strong companies that have proven their worth -- as opposed to more high-risk start-up companies. "We had a value orientation, and we continue largely in that value orientation," Rodin said. "At the end of FY 2000 and in the beginning of FY 2001 we are substantially better than benchmarks." The current data for FY 2001 shows Penn's endowment up 4 percent, as opposed to a benchmark loss of 5 percent. Furthermore, the equity portion of Penn's endowment is up 7 percent despite a benchmark of a 10 percent loss. But other universities aren't rushing to dump their stocks in favor of more stable investments -- at least not yet. David Leenders, assistant controller of Dartmouth University, said that Dartmouth is remaining cool-headed. Dartmouth had posted a 41 percent increase in its endowment for FY 2000, largely a result of its high-risk stock market investments. "We're concerned about [the stock market] obviously, but we try not to overreact to market changes," said Leenders, who noted that Dartmouth may reconsider its position "if we see something that is a long-term trend." Penn, for one, is working to diversify its assets for long-term economic stability after watching the endowments of its peers skyrocket and now begin to head downward. Vice President for Finance and University Treasurer Craig Carnaroli said the economy is not going to prevent Penn from continuing to vary its portfolio. "The general strategy has been diversification," said Carnaroli. Carnaroli also explained that endowments are invested over time and that universities which had heavily invested in venture capital and tech stocks are likely to ride out the storm rather than sell. "I think what you'll see is people tend to invest endowments for the long-term," Carnaroli said. Currently, Penn's endowment is invested 53 percent in equities, 21 percent in bonds, 12 percent in excess returns and 13 percent in diversified options.