Wick Sloane ’76 writes with questions about the endowment. I have answers.

I’m sure there’s a hard way to do this. Then, there’s the easy way: Ask David.

Indeed! Questions are always welcome.

What is the asset allocation of the Williams endowment? How much bonds, equities and then the fancy stuff — hedge funds, private equities and all?

Page 3 of this pdf provides the answer.

(Thanks to reader DB for the graphic. Click for larger version.) 50% in global equities will not have generated very good returns in the last few months. 12% in bonds (fixed income) may seem low but is consistent with the advice offered in Pioneering Portfolio Management by David Swensen, CIO of the Yale endowment and far-and-away the most successful endowment manager in the world.

(PPM is required reading for anyone interested in endowment management. Alas, it is slow going. Swensen argues that fixed income investing is a bad idea for endowments. Previous comments on Swensen here. Yale has only 4% of its money in fixed income.)

Private equity, venture capital and absolute return make up 25% of the portfolio. It is tough to know whether the 12% in real assets (commodities?) and real estate is invested passively, just to get exposure to these asset classes, or in hedge funds which are trying to beat some passive index. More transparency please.

An acquaintance mentioned that Williams recently did a review of its asset allocation, perhaps in conjunction with the hiring of CIO Collette Chilton in 2006. He even mentioned the name (which I forgot) of the consultants who worked on it. It would be interesting to see a copy of the report that was produced.

Overall the asset allocation is reasonable, although still quite different from that of Yale. Is Collette Chilton smarter than David Swensen? Time will tell.

Which brings me to the questions I shall put once I have dug this up –

Since this market adjustment, has the Williams endowment gone up, stayed the same, or gone down?

The endowment has almost certainly been crushed from June 30 through today. (See here for a discussion of how one might derive a rough estimate. An ambitious student from Purple Bull ought to volunteer to work with me on making this estimate more precise and updated daily.)

The only public data we have are the results for the endowment for fiscal 2008, ending June 30, 2008. The endowment was down 5%. The members of the investment committee certainly receive (or could receive) quarterly updates. You should call the investment office and ask to see the same reports that they get. Tell us what happens!

Why, you will ask in one of your delightfully vilifying comments, am I dumb enough to ask?

Glad you asked. If an institution with no plans for substantial growth is fortunate enough to have an endowment about 18 times its operating budget, what is the appropriate risk position for the endowment? Why not put it all in inflation adjusted US Treasuries, count your blessings, and sit down on a log with a few students? Totally too conservative?

The standard answer is that the expected life of the endowment is forever, so there is no need to be “conservative.” The College would rather average 8% real return per year (with some very bad years and very good years) than 3% over the next 50 years. It is precisely the wealth of Williams that allows it to be so risk-seeking. If occasional years of down 25% are the price to be paid for this excess return, then so be it.

The trickier issue is just what risk-seeking really means in this context. Swensen has moved 29% of Yale’s endowment into real assets. (Background discussion here (pdf). Why is Williams at 6%? Perhaps Collette Chilton knows something that David Swensen does not . . .

OK, 15% in equities of varying sorts. Even I know that the amount anyone has in equities should not exceed by one cent what that person/institution can afford to lose. So, by definition, if Williams are saying this crisis has been a crisis for Williams, well, shouldn’t the trustees on the investment committee resign?

No! That is crazy talk. The Williams endowment has had down years in the past. It will have down years in the future. We can afford to take smart, long-term risks. If Williams had followed the maximum-safety approach starting 50 years ago that you seem to be recommending (90% of the money in T-bills?), the College would be much less wealth today. (How much less wealthy is left as an exercise to the reader.)

If the endowment went down enough to have everyone in a panic and, as Ephbloggers say, to end the days of new buildings, then, wasn’t too much invested in equities? Meaning, more than Williams could afford to lose.

In the context of Columbia’s endowment, Professor Ralph Bradburd is more sanguine.

In the current volatile economic climate, it is hard to peg exactly how Columbia’s endowment has fared, but Bollinger acknowledged that “we’re not doing as well as we did two or three years ago.” However, economic indicators have dropped sharply lately—last week alone, the Dow Jones Industrial Average dropped by 7.3 percent and the S & P 500 by 10.3 percent, the worst week in seven years.

In the short term, that doesn’t spell disaster, according to Ralph Bradburd, an economics professor at Williams College, who studies higher-education finance. That’s because universities typically spend from their endowments at a constant rate each year, which takes into account both sluggish and strong years.

“Let’s say the endowment fell by 15 percent this year—which is not outside of the question depending on how the university invested. Spending might not change much,” Bradburd said. “If you have three years [of losses], you might do something.”

Correct. It all depends on how you think the endowment will do over the next year or ten. Unfortunately, the two main sources of endowment growth (investment returns and alumni contributions) are highly correlated. If the markets are down and stay down for the next few years, returns will stink and alumni contributions will be lower than they otherwise would be. (The class agent mailings already express a great deal of nervousness.)

What happens if the Williams endowment is down 25%, and then stays down for several years? How likely is that scenario? Tough to know. I have been a bear since 1994, so don’t look to me for guidance. If I were a trustee, I would be concerned. I would give serious thought to delaying the renovation of Sawyer for at least a couple of years.

There are 100 odd educational endowments that are comparable to Williams. As far as I know, our endowment was at the very bottom in terms of performance last year. Cause for concern? Perhaps. But there is no excuse for the lack of transparency in endowment allocation and performance. Why keep secrets if you have nothing to hide?

Print  •  Email