When Walé Adeosun, CIO and treasurer of Rensselaer Polytechnic Institute, decamped to Manhattan’s Chesapeake Asset Management in April — along with his two investment staffers — RPI’s trustees and president Shirley Ann Jackson had a decision to make. Should the Troy, New York–based engineering school rebuild its investment office or find another way to manage its $800 million endowment fund?
CFO Virginia Gregg says RPI didn’t really have a choice. “We were in a position where our entire investment group left together and gave us four months’ notice,” she explains. “We felt we did not have enough time to furiously hire a group back in.” So RPI hired Boston’s HighVista Strategies, an endowment-style investment manager, to take on its portfolio.
Outsourcing has become a viable way for schools to ensure that their funds are professionally managed without having to staff up. Several firms now offer this service, touting their ability to invest like a top endowment. The oldest is Investure, founded in 2003 by longtime University of Virginia endowment manager Alice Handy in the college town of Charlottesville. Most — including Makena Capital Management in Menlo Park, California, and Chapel Hill, North Carolina–based Morgan Creek Capital Management — were established by former endowment officers. Trying to match endowments at their own game was a noble goal back when Harvard University and Yale University were generating annual returns of more than 20 percent. Since the market collapse began in 2007, however, it’s taken on a different emphasis.
Wilshire Associates’ Trust Universe Comparison Service (TUCS) reported a –19.14 percent average return for all endowments and foundations for the year ended June 30, 2009. The highest-profile schools posted some of the largest declines, partly because of high allocations to public and private equity as well as to illiquid investments. Harvard’s endowment lost 27 percent of its previous $36 billion value, while Stanford University’s fund dropped 26 percent.
Endowment-style funds did not escape the carnage. In keeping with their mandates to emulate the management styles of top schools, most suffered portfolio losses above those of the average endowment. According to one investor, for the 2008 calendar year, Morgan Creek’s Endowment Fund dropped 24.3 percent; Global Endowment Management of Charlotte, North Carolina, fell 22.8 percent; and HighVista lost 16.6 percent. Despite these nosedives, clients like RPI and Vermont’s Middlebury College have no regrets. “We are very pleased with the outsourcing decision,” says Churchill Franklin, a trustee emeritus of Middlebury and executive vice president and COO at Boston’s Acadian Asset Management. “It helped us enormously through the downturn and more than paid for itself.” During the 2009–’10 fiscal year, Middlebury earned a healthy 17.7 percent return.
Now the picture has brightened for everyone. Endowments gained an average of 12.22 percent in the 12 months ended June 30, according to TUCS. But returns vary. Among the Ivies, Harvard gained 11 percent from June 2009 through June 2010, besting Yale’s 8.9 percent investment return. Princeton University jumped 14.7 percent, while Columbia University beat them all with a 17 percent gain.
While Adeosun still oversaw the RPI endowment, it ended 2008–’09 down 19.7 percent. It has since bounced back. Gregg calls performance “positive this year, within the average endowment range.” She’s hoping for better things in 2011. RPI hired HighVista for its focus on risk management and capital protection, and for its smaller size, the CFO notes. “We’ve been pleased by these six months,” Gregg says. “We outsourced and are sort of in process.”
