University Business - December 2008 - (Page 39)

ENDOWMENT MANAGEMENT Market Meltdowns and for new market realities Allocation Endowment Strategies By Ann C. Logue he world’s financial markets spent the latter part of 2008 in an unprecedented state of volatility. Pictures of frazzled and depressed traders became one of the worst clichés in the news because they seemed to run every day. such storied firms as Merrill lynch and aiG had to be rescued by the federal government, and average people shared stories of how smoothly their accounts were transferred after their banks failed. it’s unclear if it will blow over, as the 1987 market crash did, or if it is a harbinger of worse things to come, as in 1929. all we know is that assumptions about endowment risk and return have been shaken up. some types of investments previously thought of as secure, such as money markets, and some strategies, such as securities lending, have proven to be risky. Most people knew that on an intellectual level, but as they had never experienced losses with them, they forgot about it emotionally. when the dow is climbing, “you get complacent about risk,” says robert furnari, managing director at northern Trust Global advisors in stamford, conn. “There was a false sense of security, because even risky asset classes that historically had a lot of volatility had settled down.” as much as finance professors talk about rational investors and efficient markets, it’s emotions—hope, fear, and greed—that drive day-to-day market action. and right now, fear is in fashion, so many investors are selling no matter how low prices go. The government has been supporting failing financial institutions, but “the interventions will bring their own problems,” says dick anderson, director of the higher education practice at hammond associates in st. louis. “University endowments are very longuniversitybusiness.com T term investors,” so not all of the market’s issues affect them, says John curry, managing director of the higher education practice of huron consulting Group in Boston. Unfortunately, it may be more difficult for a university to keep that longterm focus when part of the endowment is needed today. an individual who won’t be retiring for 20 more years can stay the course; that advice might not work for an endowment expected to contribute $15 million to the institution’s budget— especially if fundraising levels fall off with the economy. (it may be a long, long time before anyone anywhere has any highly appreciated stock to donate.) “what i’m saying to clients is don’t panic and don’t make any knee-jerk reactions,” says furnari. The only way to be prepared for any scenario is for endowments to hold a wide range of assets and work with several money managers. That is easier said than done. The problem now is that the declines in the market have been systematic. stocks, bonds, cash, real estate, and commodities have all been affected, leaving even many diversified endowments in dire straits. it’s unclear how well hedge funds, originally designed to protect investors from market gyrations, have performed. Most funds report results quarterly, so it won’t be clear until January who did what. once the good managers stand out, “hedge funds are going to fall like rotten apples,” predicts anderson. curry says that good hedge funds will protect many endowments. “depending on how they are mixed in the portfolio, that may help them through this,” he says. Unfortunately, some of the funds that will not be doing well will be those that have had long histories of success. The extremes of the 2008 market have tested all sorts of assumptions about risk levels. strategies that work one day might not work the next as prices whip up and down. Rebalance foR long-TeRm SucceSS Many investment experts believe that rebalancing the mix of investments in an endowment is important to long-term success. Periodically, investors should buy and sell assets in order to return to the original asset allocation among stocks, bonds, cash, and alternative investments. This year, most endowments will find that their allocation to stocks is lower than it should be, so the challenge will be to sell other assets to buy stocks. since general price declines have made some assets really inexpensive, the manager of an endowment with extra cash might be able to pick up some bargains. The problem is that it’s not easy to sell anything these days to raise cash for investment or spending purposes. “liquidity is such an issue,” furnari says. “You have to balance that against the cost of selling fixed income to buy equities.” at an extreme, commonfund had to limit withdrawals from its fund for short Term investments because prices for the underlying assets were falling, even though they would return to full value at their December 2008 | 39 http://www.universitybusiness.com

Table of Contents for the Digital Edition of University Business - December 2008

University Business - December 2008
Contents
Editor's Note
College Index
Company Index
Advisory Board
Behind the News
Sense of Place
Viewpoint
Human Resources
2009 Annual Directory to Financial Services
Future Shock
Independent Outlook
Endowment Management
Look Before You Leap
50 Best Branding Ideas
Remedial Nation
What's New
Facilities Focus
End Note

University Business - December 2008

http://www.nxtbook.com/pmg/UB/UB_1119
http://www.nxtbook.com/pmg/UB/UB_1019
http://www.nxtbook.com/pmg/UB/UB_0819
http://www.nxtbook.com/pmg/UB/UB_0719
http://www.nxtbook.com/pmg/UB/UB_0619
http://www.nxtbook.com/pmg/UB/UB_0419
http://www.nxtbook.com/pmg/UB/UB_0319
http://www.nxtbook.com/pmg/UB/UB_0119
http://www.nxtbook.com/pmg/UB/UB_1218
http://www.nxtbook.com/pmg/UB/UB_1118
http://www.nxtbook.com/pmg/UB/UB_1018
http://www.nxtbook.com/pmg/UB/UB_0918
http://www.nxtbook.com/pmg/UB/UB_0818
http://www.nxtbook.com/pmg/UB/UB_0718
http://www.nxtbook.com/pmg/UB/UB_0618
http://www.nxtbook.com/pmg/UB/UB_0518
http://www.nxtbook.com/pmg/UB/UB_0418
http://www.nxtbook.com/pmg/UB/UB_0318
http://www.nxtbook.com/pmg/UB/UB_0218
http://www.nxtbook.com/pmg/UB/UB_0118
http://www.nxtbook.com/pmg/UB/UB_1217
http://www.nxtbook.com/pmg/UB/UB_1117
http://www.nxtbook.com/pmg/UB/UB_1017
http://www.nxtbook.com/pmg/UB/UB_0917
http://www.nxtbook.com/pmg/UB/UB_0817
http://www.nxtbook.com/pmg/UB/UB_0717
http://www.nxtbook.com/pmg/UB/UB_0617
http://www.nxtbook.com/pmg/UB/UB_0517
http://www.nxtbook.com/pmg/UB/UB_0417
http://www.nxtbook.com/pmg/UB/UB_0317
http://www.nxtbook.com/pmg/UB/UB_0217EPUB
http://www.nxtbook.com/pmg/UB/UB_0217
http://www.nxtbook.com/pmg/UB/UB_0117
http://www.nxtbook.com/pmg/UB/UB_1216
http://www.nxtbook.com/pmg/UB/UB_1116
http://www.nxtbook.com/pmg/UB/UB_1016
http://www.nxtbook.com/pmg/UB/UB_0916
http://www.nxtbook.com/pmg/UB/UB_0816
http://www.nxtbook.com/pmg/UB/UB_0816CG
http://www.nxtbook.com/pmg/UB/UB0716
http://www.nxtbook.com/pmg/UB/GlobalSellSheet
http://www.nxtbook.com/pmg/UB/UB_0616
http://www.nxtbook.com/pmg/UB/UB_0516
http://www.nxtbook.com/pmg/UB/UB0416
http://www.nxtbook.com/pmg/UB/UB0316
http://www.nxtbook.com/pmg/UB/UB_0216r2
http://www.nxtbook.com/pmg/UB/UBGuide
http://www.nxtbook.com/pmg/UB/UB0116
http://www.nxtbook.com/pmg/UB/UB
http://www.nxtbook.com/nxtbooks/pmg/ub201511
http://www.nxtbook.com/nxtbooks/pmg/ub201510
http://www.nxtbook.com/nxtbooks/pmg/ub201509
http://www.nxtbook.com/nxtbooks/pmg/ub201508
http://www.nxtbook.com/nxtbooks/pmg/ub201508_ConsultantsGuide
http://www.nxtbook.com/nxtbooks/pmg/ub201507
http://www.nxtbook.com/nxtbooks/pmg/ub201506
http://www.nxtbook.com/nxtbooks/pmg/ub201506_AudioVisualSolutions
http://www.nxtbook.com/nxtbooks/pmg/ub201505
http://www.nxtbook.com/nxtbooks/pmg/ub201504
http://www.nxtbook.com/nxtbooks/pmg/ub201503
http://www.nxtbook.com/nxtbooks/pmg/ub201502
http://www.nxtbook.com/nxtbooks/pmg/ub201501
http://www.nxtbook.com/nxtbooks/pmg/ub201501_FinancialServicesGuide
http://www.nxtbook.com/nxtbooks/pmg/ub201412
http://www.nxtbook.com/nxtbooks/pmg/ub201411
http://www.nxtbook.com/nxtbooks/pmg/ub201410
http://www.nxtbook.com/nxtbooks/pmg/ub201409
http://www.nxtbook.com/nxtbooks/pmg/ub201408
http://www.nxtbook.com/nxtbooks/pmg/ub201408_ConsultantsGuide
http://www.nxtbook.com/nxtbooks/pmg/ub201407
http://www.nxtbook.com/nxtbooks/pmg/ub201406
http://www.nxtbook.com/nxtbooks/pmg/ub201406_AudioVisualSolutions
http://www.nxtbook.com/nxtbooks/pmg/ub201405
http://www.nxtbook.com/nxtbooks/pmg/ub201404
http://www.nxtbook.com/nxtbooks/pmg/ub201403
http://www.nxtbook.com/nxtbooks/pmg/ub201402
http://www.nxtbook.com/nxtbooks/pmg/ub201401
http://www.nxtbook.com/nxtbooks/pmg/ub201401_FinancialServicesGuide
http://www.nxtbook.com/nxtbooks/pmg/ub201312
http://www.nxtbook.com/nxtbooks/pmg/ub201311
http://www.nxtbook.com/nxtbooks/pmg/ub201310
http://www.nxtbook.com/nxtbooks/pmg/ub201309
http://www.nxtbook.com/nxtbooks/pmg/ub201308
http://www.nxtbook.com/nxtbooks/pmg/ub201308_ConsultantsGuide
http://www.nxtbook.com/nxtbooks/pmg/ub201307
http://www.nxtbook.com/nxtbooks/pmg/ub201306_AudioVisualSolutions
http://www.nxtbook.com/nxtbooks/pmg/ub201306
http://www.nxtbook.com/nxtbooks/pmg/ub201305
http://www.nxtbook.com/nxtbooks/pmg/ub201304
http://www.nxtbook.com/nxtbooks/pmg/ub201303
http://www.nxtbook.com/nxtbooks/pmg/ub201302
http://www.nxtbook.com/nxtbooks/pmg/ub201301
http://www.nxtbook.com/nxtbooks/pmg/ub201301_FinancialServicesGuide
http://www.nxtbook.com/nxtbooks/pmg/ub1212
http://www.nxtbook.com/nxtbooks/pmg/ub1112
http://www.nxtbook.com/nxtbooks/pmg/ub1012
http://www.nxtbook.com/nxtbooks/pmg/ub0912
http://www.nxtbook.com/nxtbooks/pmg/ub_cg12
http://www.nxtbook.com/nxtbooks/pmg/ub070812
http://www.nxtbook.com/nxtbooks/pmg/ub0612
http://www.nxtbook.com/nxtbooks/pmg/ub_avguide0612
http://www.nxtbook.com/nxtbooks/pmg/ub0512
http://www.nxtbook.com/nxtbooks/pmg/ub0412
http://www.nxtbook.com/nxtbooks/pmg/ub0312
http://www.nxtbook.com/nxtbooks/pmg/ub0212
http://www.nxtbook.com/nxtbooks/pmg/ub_financeguide0112
http://www.nxtbook.com/nxtbooks/pmg/ub1211
http://www.nxtbook.com/nxtbooks/pmg/ub1011
http://www.nxtbook.com/nxtbooks/pmg/ub0911
http://www.nxtbook.com/nxtbooks/pmg/ub_cg11
http://www.nxtbook.com/nxtbooks/pmg/ub0711
http://www.nxtbook.com/nxtbooks/pmg/ub0611_av
http://www.nxtbook.com/nxtbooks/pmg/ub0611
http://www.nxtbook.com/nxtbooks/pmg/ub0511
http://www.nxtbook.com/nxtbooks/pmg/ub0411
http://www.nxtbook.com/nxtbooks/pmg/ub0311
http://www.nxtbook.com/nxtbooks/pmg/ub0211
http://www.nxtbook.com/nxtbooks/pmg/ub0111
http://www.nxtbook.com/nxtbooks/pmg/ub_financeguide0111
http://www.nxtbook.com/nxtbooks/pmg/ub1110
http://www.nxtbook.com/nxtbooks/pmg/ub1010
http://www.nxtbook.com/nxtbooks/pmg/ub0910
http://www.nxtbook.com/nxtbooks/pmg/ub_2010financeguide
http://www.nxtbook.com/nxtbooks/pmg/ub_2010consultants
http://www.nxtbook.com/nxtbooks/pmg/ub_2010avguide
http://www.nxtbook.com/nxtbooks/pmg/ub0710
http://www.nxtbook.com/nxtbooks/pmg/ub0610
http://www.nxtbook.com/nxtbooks/pmg/ub0510
http://www.nxtbook.com/nxtbooks/pmg/ub0410
http://www.nxtbook.com/nxtbooks/pmg/ub0310
http://www.nxtbook.com/nxtbooks/pmg/ub0210
http://www.nxtbook.com/nxtbooks/pmg/ub0110
http://www.nxtbook.com/nxtbooks/pmg/ub1109
http://www.nxtbook.com/nxtbooks/pmg/ub1009
http://www.nxtbook.com/nxtbooks/pmg/ub0909
http://www.nxtbook.com/nxtbooks/pmg/ub0709
http://www.nxtbook.com/nxtbooks/pmg/ub_fg09
http://www.nxtbook.com/nxtbooks/pmg/ub0609
http://www.nxtbook.com/nxtbooks/pmg/ub0509
http://www.nxtbook.com/nxtbooks/pmg/ub0409
http://www.nxtbook.com/nxtbooks/pmg/ub0309
http://www.nxtbook.com/nxtbooks/pmg/ub0209
http://www.nxtbook.com/nxtbooks/pmg/ub0109
http://www.nxtbook.com/nxtbooks/pmg/ub1208
http://www.nxtbook.com/nxtbooks/pmg/ub1108
http://www.nxtbook.com/nxtbooks/pmg/ub1008
http://www.nxtbook.com/nxtbooks/pmg/ub0908
http://www.nxtbook.com/nxtbooks/pmg/ub0808
http://www.nxtbook.com/nxtbooks/pmg/ub0708
http://www.nxtbook.com/nxtbooks/pmg/ub0608
http://www.nxtbook.com/nxtbooks/pmg/ub0508
http://www.nxtbook.com/nxtbooks/pmg/ub0408
http://www.nxtbook.com/nxtbooks/pmg/ub0308
http://www.nxtbook.com/nxtbooks/pmg/ub0208
http://www.nxtbook.com/nxtbooks/pmg/ub0907
http://www.nxtbook.com/nxtbooks/pmg/ub0807
http://www.nxtbook.com/nxtbooks/pmg/ub0707
http://www.nxtbook.com/nxtbooks/pmg/ub0607
http://www.nxtbook.com/nxtbooks/pmg/ub0507
http://www.nxtbook.com/nxtbooks/pmg/ub0407
http://www.nxtbook.com/nxtbooks/pmg/ub0307
http://www.nxtbook.com/nxtbooks/pmg/ub0207
http://www.nxtbook.com/nxtbooks/pmg/ub0107
http://www.nxtbook.com/nxtbooks/pmg/ub1206
http://www.nxtbook.com/nxtbooks/pmg/ub1106
http://www.nxtbook.com/nxtbooks/pmg/ub1006
http://www.nxtbook.com/nxtbooks/pmg/ub0906
http://www.nxtbook.com/nxtbooks/pmg/ub0806
http://www.nxtbook.com/nxtbooks/pmg/ub0706
http://www.nxtbook.com/nxtbooks/pmg/ub0606-GG
http://www.nxtbook.com/nxtbooks/pmg/ub0606
http://www.nxtbook.com/nxtbooks/pmg/ub0506
http://www.nxtbook.com/nxtbooks/pmg/ub0406
http://www.nxtbookMEDIA.com