UTIMCO financial reports show UT’s investment manager lost about $2.6 billion — 15 percent of the University’s endowment value — during the last fiscal year, but still outperformed other, larger academic endowments such as Harvard, Yale and Princeton.
UTIMCO CEO Bruce Zimmerman and advisers to the company said fewer investments in riskier alternative assets and smaller required payouts of endowment returns to campuses softened the blow.
Losses for university endowments averaged around 19 percent as of the end of June, according to Wilshire Associates, an investment analyst firm.
For Princeton, this will mean a shrinking faculty, fewer academic courses, staff cuts and other layoffs. Endowment payouts for academic purposes are being cut by 8 percent in each of the next two years, and the University offered a voluntary retirement-incentive program to 459 eligible nonfaculty during the summer.
Expansion on the Harvard campus, including a new billion-dollar science complex, has slowed substantially and in some areas ground to a halt, according to the Boston Globe.
Most large university endowments over the last 25 years latched on to the blueprint of Yale Chief Investment Officer David Swensen. The University recruited the Wall Street manager in the mid-1980s to increase the growth of its endowment assets.
Previously, University endowments usually put about 70 percent of investments in publicly traded stock, or equity and the remainder in low-risk, low-return bonds. Swensen shook things up by investing in alternative assets such as private investments, hedge funds and commodities.
Since these alternatives don’t receive the same level of attention from investors or government scrutiny as publicly traded equity, there is a greater chance of finding undervalued assets.
But with increased reward comes increased risk. Alternatives are less liquid, meaning one can’t usually sell them off quickly like public stocks but must instead give notice well in advance. Alternatives also typically require longer to pay out, which means a long-term commitment from investors.
“Over the past 20 years, he has done remarkably well with that strategy,” said Keith Brown, adviser to the UTIMCO board of directors and board of trustees at the Teacher Retirement System of Texas.
Brown said UTIMCO paid more attention to the risk of illiquidity than other universities that fully embraced the Swensen model.
Brown said liquidity became largely immaterial in the eyes of many endowment managers who adopted Swensen’s strategy with gusto. When the recession hit, many found themselves locked into investments that were on a downward trajectory. Some who did give enough notice to their hedge funds to cash out on time were turned away in breach of contract.
While UTIMCO faced losses across the board, Brown said it had less trouble, thanks to investment policies that took liquidity concerns into account.
About $100 million did get locked up by hedge funds when the company approached them to give notice, but Zimmerman said this wasn’t a significant problem since there weren’t major liquidity issues elsewhere.
“It really didn’t hurt us,” Zimmerman said. “I mean, it was a bit of a nuisance.”
Michael Peltz, executive editor at Institutional Investor magazine, said alternatives aren’t necessarily a bad thing.
“The biggest problem isn’t that they’ve lost all the money,” Peltz said. “It’s that they’ve become so reliant on that money to help pay the bills.”
Princeton University, for example, funds 48 percent of its operational budget with endowment returns. Only 8 percent of the 2009-10 UT budget came from endowment returns.
Peltz said this forced endowment investors to sell off some of their public stocks to pay for basic operations at their universities. When the market began going up in March, many missed out on the run.
Former Board of Regents Chairman Charles Miller said he thought the company’s ventures into private equity and hedge funds were too extensive. Miller said because a smaller percentage of UT’s budget comes from investment returns, there is not as great a need for rapid growth of the endowment.
“We don’t get the benefit from really high performance because it’s not as big a factor,” said Miller.
Zimmerman said UTIMCO would stick with the current allocation of assets, with just more than 50 percent of the endowment money in alternatives such as hedge funds. It will also continue to move out of public stocks and into fixed income, including corporate and government bonds, which provide a regular, stable income stream.
Zimmerman said the most important lesson UTIMCO took away from the recession was an increased focus on “improbable but possible events,” such as the collapse of the subprime loan market.
“It may be a one-in-80-year event, but it happens,” Zimmerman said.
To this end, he said the company is guarding against a potential for future inflation that may result from the massive federal stimulus bill, by buying into $20 million worth of investments that pay off if inflation rises.
It will take time for the effects of any such improvement to be felt at the UT and A&M systems. Unlike Harvard or Yale, the downturn has proved less crippling to UT-Austin’s budget. Money from the Permanent University Fund accounted for 8 percent of this year’s budget, but that $161 million is set to decline.
Money from the Available University Fund — an intermediate fund for endowment payouts — goes to UT-Austin for library upkeep, special academic programs and research.
UT budget director Mary Knight said the University also relies on those funds to pay for part or all of some salaries. Figures from the UT System predict payouts from the PUF will continue to decline for at least the next three years.
For the 2011-12 fiscal year, it is expected to dip down to $145 million. The drop represents a $20 million decrease since 2008.
With those declining payouts in mind, UT administrators are in the process of reallocating millions within the budget to top priorities, like hiring professors and recruiting top graduate students. Eliminations can be expected in nontenure faculty and staff jobs in some colleges.
Students at the McCombs School of Business have seen career advising services cut. But while work sites are left idle at Harvard, construction at UT continues unabated.
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