David Lei | Having the patience to persevere

In a commercial I’ve been seeing a lot on television recently, a jittery investor asks his broker how he should react to the unease in the financial markets. The broker tells him not to panic and suggests that he make only small adjustments to his portfolio. After all, acting on fear in an environment of uncertainty inevitably results in regret.

Across the country, college-endowment managers have spent the past several months putting out fires in their portfolios. Smarting from withering losses, some have considered becoming much more conservative investors — a decision that will surely prove to be rash and misguided.

Reports by Reuters last week suggest that Stanford University may sell $1 billion of the $5 billion it has invested in illiquid assets. And in what was apparently a very controversial internal decision, the University of Chicago sold $600 million of public equities near the bottom of the market last year so that it could move the money into “safer instruments.”

Their worry is understandable — performance figures for the fiscal year ending this past June were released last month, and calling them weak is a gross understatement.

Harvard and Yale in particular saw stunning declines — 27.3 and 30 percent, respectively. In a reversal of last year’s worst-in-the-Ivies performance, Penn fared significantly better this year, with losses of just 15.7 percent.

Some argue that colleges and universities, as long-lived institutions, should invest conservatively. They should park their money in cash and marketable securities such as stocks and bonds — preferably bonds. And they should certainly stay away from alternative assets — hedge funds, private equity, real estate and natural resources.

But universities can and should take a long-term view on their investments. Holding onto more liquidity — cash and marketable securities, essentially — than is absolutely necessary is just not very smart.

David Swensen, Yale University’s celebrated chief investment officer, was an early champion of a different approach to endowment management. He has stressed the importance of broad asset diversification and keeping excess liquidity low.

For example, Swensen pioneered investment in timber. It’s an asset that grows in the truest sense of the word and can increase in value practically on its own, even through poor market conditions. This kind of creative thought has let Yale and its imitators achieve a remarkably consistent, high-level of performance over the past two decades.

The Swensen Model did have a very bad year. Harvard and Yale are its closest adherents, and I already mentioned their returns. But performance in any given fiscal quarter or year is not particularly meaningful. And aggressive endowment management can be credited, directly and indirectly, with some very important advances in higher education — advances that would not have been possible with single-digit growth.

Outstanding investment returns over the past couple of decades have funded cutting-edge research and state-of-the-art facilities. And the strong financial health of colleges and universities has made it possible for them to provide incredibly generous financial aid.

For its part, Penn seems to be headed in the right direction. Traditionally it’s been less invested in alternative asset classes than many of its peers, likely a part of the reason why it outperformed other schools this year. But it’s taken a more-aggressive investment strategy in the last several years. According to recent comments made by Chief Investment Officer Kristin Gilbertson to Fortune, Penn’s endowment is 25 percent invested in hedge funds and has approximately 12-13 percent allocated to private equity and other illiquid assets. And considerable money has been put to work in distressed debt over the past few years. Although the Swenson model of investment suffered extreme setbacks this year, I’d hate to see it abandoned as the preferred investment strategies for universities — particularly Penn, which has yet to truly reap the benefits of the model.

David Lei is a Wharton senior from Brooklyn, NY. He is the executive director of the College Republicans and the former executive editor of the DP. His email address is lei@dailypennsylvanian.com.

Please note All comments are eligible for publication in The Daily Pennsylvanian.