THE ENDOWMENT GOES LONG
The bars represent
the 30 colleges and
universities that had
endowment market
values in excess of
$2 billion in the 2008
fiscal year. The UNC
Investment fund’s
8 percent return
ranked second.
In addition, UNC’s
16. 7 percent three-year
return ranked fourth
among the 30. Its 16. 3
percent five-year return
ranked ninth.
10%
8%
6%
4%
2%
0%
- 2%
- 4%
- 6%
- 8%
- 10%
chaos caused investors to worry and wonder
if the markets would bounce back before
they needed their money, the endowment
fund could afford to sit back and ride it out.
“The benefit that we have is that we
have a long time horizon,” said Davy
Davidson ’ 77, a former investment banker
who has been involved with the endowment since the 1990s. “We can weather
downturns.” Davidson is the immediate
past chair of the General Alumni Association’s Board of Directors.
“It really, really is important to have a
long-term focus in these times,” King told
the trustees in November.
A third advantage the endowment fund
has, which SUNY Buffalo’s Tiu touched
on, is its ability to achieve extraordinary
diversification. The traditional stock-bond
split you might hold in your 401(k) doesn’t
cut it for endowments: UNC invests in at
least nine different asset classes, from
domestic stocks to distressed debt, energy
to real estate. “The basic premise is that by
being diversified, you lower the overall
risk,” Schwab said. “And if you pick the
right managers, you will see higher
returns.”
Within these asset classes, Schwab says,
more than 100 different management firms
are used, each an expert in its given field,
and many open only to investors with
giant pools of capital. Indeed, officials at
N.C. State University, which is in the
process of placing more than half of its
$545 million endowment with the UNC
Happy Returns
Management Co., cite access to better
managers as one of their rationales.
“We want to take advantage of the large
pool of capital [at UNC],” said Kathy Hart,
NCSU’s associate vice chancellor for finance
and business. “Our pool of money couldn’t
get us access to some of the better managers.”
Access goes part of the way toward
explaining why, in the world of endowments, the rich tend to get richer — and
big endowments generally outperform
smaller ones. The wealthiest endowments
can hire better managers; they can afford to
take bigger risks with some of their assets;
they can achieve greater economies of
scale. And the poor get poorer. Smaller
institutions are more likely to be pressed
for cash and therefore more likely to be
forced to spend down their endowments
instead of letting them grow.
‘The benefit that
we have is that
we have a long
time horizon.
We can weather
downturns.’
Davy Davidson ’ 77
former investment
banker involved with
UNC’s endowment
since the 1990s
Cambridge Associates, an independent consulting firm
The transparency issue
Investing on this gargantuan scale does
require some tradeoffs, however, and one of
the sacrifices often made is transparency. The
Sustainable Endowments Institute, a nonprofit that tracks campus and endowment
sustainability, gave UNC a “D” grade in the
category of “endowment transparency” in its
most recent report card. That places the
University slightly below the average grade
of the other endowments surveyed —
which was a “D+” — in its openness with
information about how and where it invests.
Mark Orlowski, executive director of
the institute, says it is vital to make the
connection between the highly visible sustainability efforts on campus — recycling
and lowering energy use, for example —
and whether a university’s investments
reflect that same philosophy. “Endowment
transparency leads to educated dialogue,”
Orlowski said. “That’s hard to have without
information about how it is invested. It stifles the discussion.”
Orlowski notes that 33 colleges got an
“A” for transparency, including King’s former employer, Dartmouth, whose endowment is more than $1 billion larger than
UNC’s. N.C. State also earned the highest
grade but likely will lose it after it finishes
moving money to UNC Management.
“We won’t continue to get that grade,”
Hart said. “You sort of have to make a
decision. Sometimes you have to realize
that transparency in endowment investments isn’t always a good thing.”
