Endowment bears up well, despite bear market

by Jeff Bendix

In a year when the major stock market indexes tumbled and the nation's economy slowed dramatically, CWRU's endowment held up relatively well.

Preliminary figures for the University's 2001 fiscal year, which ended June 30, showed the endowment totaling $1.441 billion. That compares to $1.551 billion on June 30, 2000, a decrease of 7.1 percent, which includes the impact of endowment payouts and new gifts.

The University's pooled endowment and its outside trusts -- the two largest components of the entire endowment -- had a combined total return of negative 4.3 percent for the year. The various benchmarks which the University uses to measure its endowment performance fell 7.5 percent.

By comparison, the most comprehensive index of American stocks, the Standard & Poor's 500, was down 14.8 percent in the same period. International stocks fared even worse, declining 23.5 percent during the period.

"This past year was one of the toughest environments we've seen in a long time," said William Rose, CWRU's treasurer. He added that the diversified nature of the endowment helped to keep losses to a minimum. "Based on these preliminary results, we are definitely in the top half of universities in terms of our endowment return."

The University invests in stocks of large and small U.S. companies, international stocks, real estate, bonds and other fixed-income investments, and a variety of alternative investment vehicles such as hedge funds and venture capital funds.

Rose noted that the endowment has been consistent in its returns over the past several years. "We are very proud of the fact that we beat our benchmark for seven consecutive quarters," he said. This streak goes back to the second quarter of 1999. "The diversity of our portfolio was a big reason for that." The streak ended during the quarter that ended June 30, 2001, when the endowment slightly trailed the benchmark return.

"We have some truly exceptional fund managers who have helped mitigate the damage caused from drops in the stock market," Rose said. "Our three largest managers outperformed their benchmarks very dramatically."

Over the past five years, CWRU's pooled endowments and outside trusts together have generated an annual growth rate of 10.3 percent. The University's long-term objective over that term has been 8.1 percent, while the performance benchmark has been 10.2 percent.

The payout from the endowment for the 2001 fiscal year was approximately $68 million, compared to $62.7 million in fiscal 2000. The payout for fiscal 2002 is expected to be about $70 million.

In the past few years, the University has been altering the mix of investments which make up the endowment. Most notably, the percentage of the pooled endowment in fixed income investments has fallen from 31 percent three years ago to 17.3 percent as of June 30. The proportion of the pooled fund in real estate investments increased from 4.4 percent to 11.2 percent, while the portion in alternative investments rose from 10.9 percent to 18.5 percent.

"We're continuing to look for opportunities to generate returns independent of the stock market," Rose explained. "Our exposure to both real estate and alternative investments was a significant factor in our solid performance during the 2001 fiscal year."

Although the losses over the past year were unpleasant, Rose said, they were virtually unavoidable. "If you're going to have any kind of long-term discipline in investing, it was almost inevitable that you would have lost money last year," he explained. "But we feel our endowment is well-positioned for growth, and we expect to earn our long-term objective of the inflation rate plus 5.5 percent."

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