June 4, 2009 | Read Time: 5 minutes
Two years ago, many endowment managers disparaged cash and high-quality bonds as low-yielding investments that didn’t deserve much room in a portfolio designed to keep an organization operating in perpetuity.
Now, that looks like bull-market talk. The current buzz is all about maintaining adequate “liquidity,” which for most endowments means increasing cash and high-quality bonds.
As endowments reduced their cash and bond stakes over the past decade, they funneled more and more money into alternative investments like hedge funds and private-equity funds.
But hedge funds often require investors to lock up their money for as long as three years. And private-equity funds typically ask their initial investors to provide even more money over time — a process known as a “capital call.”
As markets fell over the past year, “it has forced people to reflect on the old, traditional parts of the portfolio and how much should you keep there,” says Jonathan D. Hook, chief investment officer at Ohio State University.
He says he has more than doubled the amount of fixed-income investments in the university’s endowment since joining the institution in August. Fixed income and cash now make up roughly a quarter of the university’s $1.6-billion endowment, which has declined by nearly 23 percent since its fiscal year ended in June. “We’ve increased our liquidity to make sure we don’t get caught in the predicament some of our peers got caught in,” Mr. Hook says. “Some of the changes are to make sure we can live and fight another day.”
Changing Allocations
Several charities in The Chronicle‘s survey sharply raised their cash allocations in early 2009, including the New York Public Library (from 2 percent in 2008 to 20 percent in 2009); Marine Toys for Tots (from 7 percent to 64 percent); Smithsonian Institution (from 6 percent to 19 percent); Direct Relief International (from 5 percent to nearly 29 percent); and Girls Incorporated (from 4 percent to 16.5 percent).
Those charities raised cash by selling stocks, bonds, or hedge funds.
Others said they were taking steps to increase liquidity, or were at least examining an increase, including the Colonial Williamsburg Foundation, Cornell University, the John D. and Catherine T. MacArthur Foundation, and the Wildlife Conservation Society.
Raising cash following a severe bear market might seem to violate a basic tenet of investing — don’t buy high and sell low. But some investing experts say they believe the market is still volatile, and that increasing cash is a prudent response.
André Perold, a professor at Harvard Business School and a founder of HighVista Strategies, which manages endowments for many charities, says chances are good that the economy will get much better — or much worse. “You have to invest today knowing there is a wide range of possible outcomes,” he says. “Risk-averse investors should maintain lower-than-normal exposures to equities and other high-risk asset classes.”
Some endowment managers who started the downturn with plenty of cash say they see opportunity amid the chaos.
The David and Lucile Packard Foundation, in Los Altos, Calif., had nearly 30 percent of its assets in cash in November 2007, when John H. Moehling became its chief investment officer. Packard was sitting on high levels of cash because its trustees had decided to sell most of its Hewlett Packard and Agilent stock, after poor performance by those stocks crushed the endowment during the 2000-2 bear market. Cash is now down to just 10 percent of its $4.2-billion endowment. In the past year, Mr. Moehling bought some private investments on the secondary market from other institutional investors facing a liquidity crunch, and invested in high-performing hedge funds that had been closed to new investors before 2008.
The funds re-opened because other endowments were forced to withdraw their investments to raise cash. “I could not be happier with the position that Packard is in,” Mr. Moehling says. “We can take advantage of opportunities that may not have been available to us had our peer institutions had adequate liquidity.”
Even so, Packard’s endowment return dropped by 25.3 percent for the fiscal year ending in December, matching the median return for endowments during that period in The Chronicle’s survey.
Risks and Rewards
As stocks got cheaper this winter, many charities seemed to have less interest in owning them. Arun Sardana, a senior vice president at UBS Financial Services, in Washington, who helps more than 30 charities manage their endowments, says roughly half his clients have temporarily chosen not to rebalance their endowments, which would mean putting more money into equities. (Rebalancing is a process in which funds are taken out of top-performing assets and the money is put into weaker-performing assets.)
“They’re worried about whether this could get any worse,” Mr. Sardana says. “Their investment policy objective — growth of income — is rapidly turning into preservation of principal.”
Mr. Sardana says he’s happy to honor those requests as long as charities understand the risk of letting cash levels increase — when markets rebound, as they have in recent months, having too much cash hurts returns.
“Those who did not go to cash, and who had the liquidity to rebalance their portfolios during the middle of winter and put more money into stocks — tough as that was — those are the people who are winners right now,” says John S. Griswold Jr., executive director of the Commonfund Institute, in Wilton, Conn. “People who got out of stocks sometime in the last six months now face the question of when to go back in.”
But Ohio State’s Mr. Hook says that focusing on keeping up with peers is what led endowment managers to pile on too many risky assets in the first place. Managers need to focus on the right mix of risk and reward for their own group’s needs, he says — even if it hurts to watch more aggressively invested endowments earn higher returns. “There are a lot of competitive people in this business, and there always will be that competition,” Mr. Hook says. “In some cases, that has driven people to make decisions that are not optimal. Hopefully, we’ll get away from that now.”
Noelle Barton and Candie Jones contributed to this article.
