<p>The crazy thing is that Yale stuck by its 25% estimate even in the face of private equity and endowment experts openly laughing. I mean, anyone could look at Yale’s asset allocation and see that they were positioned to take the biggest beating of all. Yet, they spent much of the last six month not only re-affirming their 25% projection but using it as a club to beat Harvard over the head because Harvard was (honestly, it turns out) estimating a 30% loss.</p>
<p>Yale estimated a 25% loss in December. The markets bounced back huge late in the year. Swarthmore’s and Williams’ 30% estimates ended up being 22% because of the market recovery. Yet, Yale was seemingly surprised to see their 25% estimate become 30%. How bad was that estimate to start with? It’s still early, but so far, Yale is the only school that ended up worse than their estimates - 20% worse. Everyone else is beating their estimates by 3% to 10% as you would expect with a big market recovery towards the end of the year.</p>
<p>I listened to Levin and Swensen all spring and kept thinking, “they can’t possibly believe that…” If they did, they really should be tendering their resignations. If they didn’t believe it, then they were just lying. The honest guys, with asset allocations far less aggressive than Yale’s, were all talking, and beginning to budget for, 30% losses this spring. They are mostly dancing a jig with the year end endowment results. There’s enough cushion built into a conservatively managed college’s budgets to deal with a 15% to 20% hit in an orderly way. 30% is really, really tough.</p>
<p>That’s still an issue. I expect some big caveats shoved into the annual reports by the auditors on private equity valuations!</p>
<p>Here are the losses Harvard is claiming for each asset class:</p>
<p>-28% Public Equity
-32% Private Equity
-19% Hedge Funds
-38% Real Assets
-4% Fixed Income (bonds)</p>
<p>I suspect that there will be some eye-rolling about private equity valuations, but as long as all the big boys take a stance of “that’s our story and we are all sticking to it”, there won’t be much that can be done about it.</p>
<p>What strikes me is that many of these elite Universities’ debt is starting to get close to their endowment value. Brown has over 600M in debt and a 2B endowment, Cornell and Duke almost 2B in debt each and less than 5B in the endowment. Harvard over 6B in debt and a 26B endowment. Its one thing to become overly dependent on your endowment, but to also issue massive amounts of debt when your endowment is skyrocketing seems to me to be really financially irresponsible.</p>
<p>Maybe they know something you don’t know.
Maybe they invested in UBSOL Inc.</p>
<p>Money Market & interest rate<br>
$100 to $2,499 19.50%
$2,500 to $4,999 20.50%
$5,000 to $9,999 21.25%
$10,000 to $24,999 21.75%
$25,000 to $49,999 22.25%
$50,000 to $99,999 22.75%
$100,000 and up 23.00% </p>
<p>CD
6 Months 27.25%
9 Months 29.75%
1 Year 32.00%
2 Years 33.50%
3 Years 34.25%
5 Years 35.00%
10 Years 35.50% </p>
<p>Q: Is my investment with your company safe?
A: UBSOL Inc. guarantees your deposits and return as since of its foundation in 1999, UBSOL Inc. has the required insurance coverage to provide a reliable client protection from any financial losses. Also, the investment capital of UBSOL Inc. is backed by gold in allocated storage. So investing with UBSOL Inc. has even higher protection level than keeping your money in banks, which are not well protected from global financial crises.</p>
<p>Look at their management team,
Harvard, MIT, Cornell, etc…</p>
<p>Prior to joining UBSOL, Mrs. Melissa Garland, lawyer, had completed commercial studies and obtained a Law Degree at the New York University. She then served in a law and public notary firm and further pursued his career at the District Court in Chicago, Illinois.</p>
<p>I wonder if Barack knows Mrs. Melissa Garland.</p>
<p>It’s too convoluted to post links, but some financial discussions posted by Swarthmore and Amherst shed some light on a theme that has been bubbling under the surface at many colleges. Due to structural escalators, primarily wages and benefits and debt service (I think), colleges and universities are looking at a widening budget gap in the out years. For example, Amherst was looking at increasing deficits for years to come and trying to get back to 5% endowment spending after TEN YEARS, a goal they still haven’t met despite $48 million in announced budget cuts.</p>
<p>In an April presentation on the endowment, Swarthmore outlined the compounding problem in the out years at various endowment spending levels for FY 2010. Assuming their normal growth in spending:</p>
<p>If the endowment spending this year were 4.25%, endowment would be preserved in perpetuity.</p>
<p>If the endowment spending were 5%, they would bump into the Pennsylvania state limit of 7% endowment spending in 25 years.</p>
<p>If the endowment spending were 6%, they would bump into the Pennsylvania state limit of 7% endowment spending in 7 years.</p>
<p>If the endowment spending were 7%, they would wipe out the entire billion dollar endowment in** 22 years **and state law would require immediate budget cuts.</p>
<p>As it turns out, the better than expected endowment results and some budget-cutting puts them right at their 4.25% target (and dancing a celebratory jig - the board had approaved endowment spending above the highest ever for the college 5.4%, but nobody wanted to be there). However, you can see how serious the outyear problems are for schools that are looking at 6% or even higher endowment spending this year. It gets ugly fast when there aren’t double-digit investment returns every year.</p>
<p>The market recovery at the end of the fiscal year bailed out a lot of colleges. They still have budget cutting to do (which is fine), but they are spared having to whack away at sacred cow programs.</p>
<p>Columbia announced their endowment declined about 20%-better than H and Y. Given that they have borrowed over $500million since april 2008 count me as being a little skeptical. Apparently, they did not disclose any detail information about their results.</p>
<p>The Swarthmore data is interesting. I wasn’t aware that state law had restrictions on what you could generally do with your endowment. I would have thought that was an issue for the trustees to consider within the context of the original endowment agreements under which donors made gifts. </p>
<p>In any case, the math is illustrative. If you are rich, you don’t have to dip too deeply into principal (if you do it consistently) before you exhaust your wealth.</p>
<p>I don’t compare an endowment of $20B with one of $1-2B because the latter is much more constrained.</p>
<ul>
<li>it needs to be managed more conservatively because you can’t reach for returns without risking a relatively large share of the principal.</li>
<li>it needs to generate sufficient current income plus return to account both for rising costs. In other words, to keep even, it needs to make a little more each year because the school’s actual costs rise.</li>
<li>it needs to generate sufficient current income plus return to account for general inflation. In other words, inflation erodes the real value of the endowment principle.</li>
</ul>
<p>If they keep the % payout the same, they’d be distributing more $$ each year - if things go up - covering, one hopes, the actual cost increases. </p>
<p>It’s easy to understand why Yale and Harvard would take more risk; they have much more money and can allocate a portion to risk while maintaining traditional conservative policies for what is still a very large amount. </p>
<p>I had two problems with this approach. First, it never seemed to me that they - meaning Yale in my case - were backing out of their bets. In other words, I thought they should consistently move a large portion of risk return into the conservative portion of the endowment, much as a gambler does when he takes a portion of his winnings and takes them off the table. I know Yale did that but I don’t think they did it nearly enough. (I’d suggest that compensation to the managers would have suffered if they’d moved more assets into lower return, lower risk categories.)</p>
<p>That relates to my 2nd issue, which is the endowment seems to have become an exercise in monument building. That really bothers me for a number of reasons too complex to get into here.</p>
<p>Today’s WSJ article on Lehman has some interesting points that support my feeling that these endowments with heavy private investments have much further to fall. Couple of quotes " one group of (Lehman-since Lehman is bankrupt they can be more honest about things) properties dropped in value by an estimated $5.4 billion between the week-end it filed for bankruptcy and Dec. 31. Those stemmed in part from a deteriorating market and overly lofty “marks” or valuations" and “U.S. banks have been unwilling to restructure real-estate loans because that would force them to mark down the value of their holdings”.</p>
<p>I don’t know the law. It’s referenced in this short slide show PDF on the endowment prepared by Swarthmore back in April (when the markets looked really bleak):</p>
<p>Question: who decides what is the value of illiquid investments when universities publish their endowment figure? Is it the investment company (e.g., the private equity cos) or the university? Assuming that it is the investment company, then the total value of a university’s endowment is simply adding up all the values of the invesment that the PE firms say that a school has. In this case, universities don’t have an option in deciding what its endowment is worth, right? Thus, they can’t manipulate the endowment figure, right?</p>
<p>The private equity fund managers provide a valuation to the endowment investors. Are these valuations optimistic? Probably. I expect this to be an issue discussed (or danced around) in the “notes” to annual financial reports this year.</p>
<p>Here’s one from a college that has most of its endowment managed by Investure down in Charlottesville:</p>
<p>See the lower right hand chart for private equity. They are estimating a $13 million loss on a $46 million fund (28%) offset by $10 million in cash calls increasing the value of the fund for a net decline of about $4 million. Is that reasonable? Beats me.</p>
:(</p>