Endowment weathers tempestuous market

By Jennifer Bussell

An April investment decision saved the University’s endowment from the brunt of the recent stock market losses. At any given time, approximately 22 percent of the University’s endowment is invested in the U.S. stock market, and so the market’s recent downward trend did result in losses. However, in April the actual allocation was lowered to 17 percent, lessening the damage.

“We were able to escape some of the bloodbath,” said Philip Halpern, the University’s chief investment officer and vice-president for finance. “We did lose money, but not as much as we could have.”

The U.S. stock market receives the largest portion of the University’s endowment, but because that is still less than one fourth of total investments, the endowment lost much less value than the stock market as a whole.

The April diversion of endowment funds lessened the potential losses further.

The exact losses over the fiscal year that ended June 30 and included the aftershocks of September 11 as well as the recent recession have not been finalized.

“In June, for example, and much of last year, everything did badly,” Halpern said. “When things are bad everywhere, you’re going to lose…There’s nothing you can do.”

According to Halpern, the University’s peer institutions invest as much as 30 percent of their endowments in American stocks. “We’re lighter in public U.S. equities,” he said.

In April, the University’s 15 investment staff members decided that the stock market would be headed down for at least the short- and intermediate-term. They moved investments from the U.S. stock market to its other investment areas, which include U.S. bonds, high yield funds, private equities, and international equities.

The seven-member investment committee of the Board of Trustees sets the University’s long-term investment policy, which is revised every three to five years. That policy places targets for each type of investment the University makes. The investment staff then tweaks those percentages to try to maximize the endowment’s value. “We try to build a diversified portfolio as best we can,” Halpern said. “We usually have ranges. You cannot guarantee against loss… you need to take some risk.”

The University invests approximately 20 percent of its endowment in private equities, a market in which being the University of Chicago makes a difference. According to Halpern, many investments such as privately held enterprises are run by partnerships that are selective about their investors. The University has an advantage over other investors like public pension plans, for example, that may not fit the partnership’s standards.

Private equity, too, was hit this year, but according to Halpern, the University’s domestic and international hedge fund investments cushioned the blow.

This year’s losses follow a 41.5 percent return on the endowment investments in 2000 and a modest loss in 2001.

According to Halpern, some of the University’s best investments have been in emerging economies. In these hedge funds, managers sell stocks short. “That’s been one of our phenomenal performers,” Halpern said.

The University investment office handles much of the University’s endowment through separate management companies. Rather than pick individual stocks, they identify sectors of the market that may prove profitable, and invest through outside managers.