A closer look at the endowment: CC investments begin to rebound

After rough economic times these past few years during which CC endowment assets, along with those of most other endowments, plummeted, the funds may be beginning a road to recovery.

Though school officials maintain that CC suffered lesser losses than most colleges, the school endowment dropped 24.6 percent between fiscal year 2007 and 2009, from roughly $523 million to $401 million, according to data collected by the National Association of College and University Business Officers (NACUBO). A May Asset Allocation Model, however, shows that the endowment has been increasing since summer 2009 and is back up to $470 million. Stacy Lutz Davidson, Director of Investments and Endowment Administration, said that the endowment rose 33 percent between March 2009 and March 2010.

The endowment puts out about $25 million in payout money for expenditures each year, which funds roughly 20 percent of the CC operating budget.

The Asset Allocation Model sheds light on the investment model which led to the current endowment status. It shows a fund breakdown between traditional methods of investments including cash, fixed income and equities- investments that put money into startup companies- that accounts for about 56 percent of the portfolio. Alternative investments make up about the remaining 43 percent of the portfolio, most of them hedge funds. Such funds are complex investments which generally involve a manager borrowing money and shifting it frequently between stocks as they reach various levels.

The endowment investment portfolio shows a largely illiquid collection of funds, including hedge funds which typically require a 60-day notice to remove money from them, and then only allow it a few times per year. The 2010 NACUBO Endowment management forum focused heavily on the need for liquidity of assets and found that “the endowment model initiated by large institutions- with broad diversification and sizable allocations to alternative investments- proved challenging in FY09.

Davidson, however, said that efforts at diversification have been slow and relatively recent at CC, so the college did not fall into the category of large endowments who were hurt by broad diversification. Davidson said that illiquidity is typical of endowments and that at CC it is less of a problem than at institutions with larger endowments. She said the school had $167 million of the endowment that they could pull out within a day or two. Some $63 million could be pulled out within a month, $44 million could be pulled out within three months and $21 million could be pulled out within a year. Less than $70 million is locked up for the entire duration of the investment. 

“We’re right where we want to be,” she said. 

In the case of many of the funds CC invests in, the school commits a certain amount of money, but the fund managers can collect that money from the school’s assets at any time to invest. Currently, $49 million is due to investment managers and Davidson said all of that money could be paid at once if necessary.

“We’re no longer living in the years where you fly by the seat of your pants and jump in and make decisions,” she said. “We’re very regulated.”

CC does not have investments in any small or mid-cap equities. Davidson said the original intent of the investment strategy was to have a portion of the assets in such equities, but that favorable opportunities did not present themselves.

“We don’t want to just fill the bucket to fill it,” she said.

Now the school has decided to eliminate the allocation portions delineating between size of equities and instead have a domestic equity bucket that may include any size of equities.

As well, CC uses the same financial manager, JW Bristol, to handle both domestic fixed assets and equities, which is becoming increasingly unusual as most managers tend to specialize in one or the other. Davidson called the management “old school” and “phenomenal.”

“We made a bet,” she said. “We know it’s not right to just invest in one manager, but we [said] he will blow anything you can create from a portfolio perspective out of the water- and he did.”

Many of CC’s endowment investments have done well in recent months. King Street Capital was one of the rare hedge fund managers who made money in both 2008 and 2009. Investments in Farallon Capital Management went up 30 percent in the past year. The school made some $5.5 million in realized gains off of the Fortress Credit Opportunities Fund. 

Some investments have proved less profitable. In January 2007 the school invested $10 million in hedge-fund Sowood Capital Management, which lost 50 percent of its funds that same year. According to a Denver Post article at the time, Monticello had advised many local institutions, particularly educational, to invest in Sowood. The article reported that Colorado State University lost as much as $6 million, Children’s Hospital lost some $1.2 million and the Daniels Fund, the largest foundation in Colorado, lost about $12 million.

CC lost almost $5 million in the Sowood debacle. Since that time, the college has been able to get most of the remaining funds back, however, given the strict requirements involving removing money from hedge funds, about $224,000 remains in Sowood until the required investment process is complete.

“When we utilize Monticello, their number one job is to bring to us the best of the best managers,” Davidson said. “It may or may not happen as we all saw with Sowood, but that’s the nature of the beast.”

Another investment was international equity Tudor Global, in which CC had $9.7 million invested in September 2009. Tudor, which Davidson described as doing a good job “holding on” during the economic crisis, started losing ground when the market began turning upwards again. The school chose to pull all of their funds from the equity and ended up losing about $300,000.

After years of relative secrecy with regard to the endowment, CC is making greater efforts these days to increase access to financial information.

Earlier this year, “endowment transparency” was responsible for lowering CC’s “grade” on a Sustainability Report Card.

This Thursday, the Board of Trustees will begin discussing which information should be released in what format. This will likely include consideration of how widely proxy voting information will be available. Additionally, once a year a list of information regarding securities would be available to the subcommittee to cut down on research.

“I am hoping that that is going to be the case,” Davidson said when asked if information would be publicly available on the website.

It was unclear, however, the extent of information that would be publicly reported. Lists of hedge funds and investments other than JW Bristol will likely not be included.

“We are working at it,” Moore said. “At the same time, we don’t want the world to know that we put one million in this company, half a million in this company. We don’t want people to copy our investment model.”

Alex Kronman and Phoebe Parker-Shames contributed reporting to this article.