| Viewing Single Post From: Blog and Media Roundup - Thursday, July 2, 2009 | |
|---|---|
| abb | Jul 2 2009, 05:35 AM |
|
http://media.www.dukechronicle.com/media/storage/paper884/news/2009/07/01/News/With-Endowment.Down.24.Dumac.Ups.Its.Cash.Liquidity-3749957.shtml With endowment down 24%, DUMAC ups its cash liquidity By: Hon Lung Chu Posted: 7/1/09 As of May 31, the University's endowment value is down 24.5 percent from its June 30, 2008 value of $6.1 billion, Executive Vice President Tallman Trask said last Thursday. According to these figures, the most recently available, the endowment is now worth $4.6 billion. At the same time, the Duke University Management Company has increased its 30-day liquidity to $1 billion-funds available within 30 days-which is currently held in cash, stocks and high-grade bonds, said Trask, a member of DUMAC's nine-person Board of Directors. "We got close to the point of not knowing whether we had any liquidity, which is why we borrowed the $500 million [in March] to make sure we have liquidity," he said. "And now we're convinced that now there is something like a billion dollars of rapid access liquidity in the pool." Trask added that it is "inconceivable" to him that Duke would ever need $1 billion dollars within a week or a month, and the main purpose of having the liquidity is to "reinvest when prudent." The cost of restructuring Although high-grade bonds historically have lower risks than other investments, their returns are also among the lowest, said Barry Bryant, Trinity '78, managing director of Dahab Associates, an investment consulting firm based in Bay Shore, N.Y. Bryant has also served as a financial consultant for the Board of Directors of the Duke Student Publishing Company, which publishes The Chronicle. According to the CME Barclays Capital U.S. Aggregate Bond Index, a widely accepted benchmark of bond performance, the average annual return on bonds is 7.6 percent in the last 10 years, Bryant said. He added that higher-risk investments such as private equity averaged 16.7 percent annual return in the last 20 years, and the Standard & Poor's 500 stock index had an annual return of 10.4 percent in the same period. In comparison, Duke's Endowment grew by an average of 15.6 percent annually in the last 10 years, according to DUMAC. Trask said private equity caused most of the losses in Duke's investments, and DUMAC has taken many steps toward lowering the risk of Duke's portfolio since the start of the economic crisis. "The main change in the portfolio is that the leverage is now completely out of it," he said. "There are no investments funded by borrowed money, which is in essence what leverage is." Trask added that along with the deleveraging, the University has returned some of its loans and has not borrowed any more money since March. He noted, however, that Duke has not repaid any of the $500 million in debt it raised in a March bond offering. "I believe, almost beyond any doubt, that we are out of any credit issues and any liquidity issues, which we never had compared to other people," Trask said. The opportunity cost of holding money in bonds is compounded every year, so the difference in earnings between high-grade bonds and private equities is "astronomical," Bryant said. He added, however, that there are occasions, such as the current economic environment, when bonds are the only investments that have positive returns. "The main purpose of investing in these types of instruments is their liquidity," Emma Rasiel, associate director of undergraduate studies and assistant professor of economics, wrote in an e-mail. "Certainly yields on bonds are relatively low at present-but that is a trade-off against the need for liquidity." Although Trask could not confirm the details of the transactions, Bryant said other private universities like Harvard have been marketing significant portions of their private equity positions to increase liquidity and Duke is probably doing the same. The endowment's performance is subpar compared to national averages. According to Northern Trust Corp., a financial firm based in Chicago, the median return for endowments and foundations is negative 20 percent for the first 11 months of the July 2008 to June 2009 fiscal year, the Wall Street Journal reported June 23. During this period, Duke's endowment lost 24.5 percent. In addition, although Trask said the endowment has grown 3 percent in May, the S&P 500 grew by 5.3 percent over the same period. Despite the portfolio's weak performance, Trask said the University has made the right choices so far to handle the crisis. "I mean, we could have just sold everything and just funded all this stuff," he said. "We didn't want to make a $1.3 billion paper loss become a $1.3 billion actual loss until we knew we have no choice. And right now I think that was exactly the right thing for us to have done, because we've now picked up 3 percent on that pool, which if we had sold it, we would have been out of it." No change in investment philosophy University endowments usually rely on the belief that as long-term investors, they have sufficient time to vie for large gains and make up the losses. "That's what a lot of people got caught on liquidity problems, because those [investments] were essentially down the curb and very hard to get back," Trask said. He added, however, that despite the changes in Duke's portfolio, the investment philosophy of DUMAC has not changed and will not change significantly. "It's still the philosophy, although it's been tempered by the deleveraging and by the liquification to the portfolio," Trask said. "Its not as aggressively in that direction as it was a year ago." Trask said the University's low reliance on the endowment, which funds 15 to 16 percent of the annual operating budget, has allowed the University to make up for the losses over a longer period of time. He added that larger endowments at peer institutions fund 30 to 50 percent of those institutions' annual budgets. "Duke's low dependence on the endowment to fund operations does mean, though, that Duke may be able to afford to take a longer-term view in this environment than some other schools," Rasiel said. Trask said that as of May 31, the University's "long-term pool," which contains the endowment and other investments, has lost $1.3 billion, and is now valued at $5.8 billion. The pool is now composed of 8.5 percent in cash and fixed investments, 20 percent in real estate and 25 percent in equities, most of which are public. Trask noted that the University has lost very little on its real estate investments. The "short-term pool," which contains mostly cash and cash equivalents, has been stable throughout the crisis. "I'm not worried about anything other than how to get the overall total expenses down to accommodate the fact that a billion dollars plus has gone out of the investment pools and therefore the earnings on those funds are not available to be spent on an annual basis," he said. |
 |
|
| Blog and Media Roundup - Thursday, July 2, 2009 · DUKE LACROSSE - Liestoppers | |
11:47 PM Nov 27
