In a time of wobbly endowment returns, UVA bucks the trend

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UVA’s endowment, which supplies more than a tenth of the University’s operating budget, outperformed many other top-tier university investment funds. Photo by Jack Looney. UVA’s endowment, which supplies more than a tenth of the University’s operating budget, outperformed many other top-tier university investment funds. Photo by Jack Looney.

America’s universities sit on an ocean of assets, holding on to hundreds of billions in long-term investments. With an endowment worth more than $5.4 billion, UVA is one of the world’s richest institutions, and it’s seeing success where other higher ed investment funds have stumbled.

“Over the last one year, three years, five years, we’re in the top decile,” said Larry Kochard, CEO and CIO at the University of Virginia Investment Management Company.

In 2011, endowments everywhere were on the rebound. UVA’s grew more than 28 percent, a bigger jump than at any other school on the list of those with the 50 biggest endowments. It was the second year of double-digit growth, erasing the shocking losses of 2008 and 2009, when the University’s endowment lost more than $1 billion and returns were at -21 percent. Annual investment reports are now rolling in from universities around the country, and while the pace of growth has slowed, UVA is still ahead of many peer institutions. UVIMCO watched the endowment in its charge return 5.1 percent this year and grow 1.6 percent to $5.4 billion, putting it ahead of two of the famously rich Ivy League schools and all but a dozen or so other institutions in the U.S. in size, and giving it relatively high marks for performance.

Kochard, a former McIntire School professor who came to UVIMCO from Georgetown’s investment fund in 2010, said that’s partly due to a strong basic recipe with the right balance of long- and shorter-term investment: 60 percent of assets are in equity—ownership shares in businesses—and the rest is allocated to real estate, bonds, and other investments. The other part of success is just selecting the right managers to move the money, he said, and when you’re UVA or one of the other top shops, you can afford to do that.

The not-so-secret secret to making big endowments bigger, Kochard said, is that you have to ride out the good times and the bad without succumbing to the desire to cash out.

“That’s usually what leads to horrible mistakes,” he said. “You have to resist the temptation of panicking at the bottom and getting euphoric at the top.”

But this has not been a banner year for most university endowments following the equity-heavy model. Many of the top-tier investment funds with assets greater than $1 billion saw returns come in relatively low and endowments shrink. Number eight Columbia’s returns were at 2.3 percent, and its endowment dipped from $7.8 billion to $7.65 billion. Yale, at number two, had returns of 4.7 percent, but shaved about $100 million off its endowment.

The numbers that got the most attention were Harvard’s. Its $30 billion endowment gave up a negative return and shrank by $1.1 billion in FY2012—more than the vast majority of universities have in their investment coffers, total.

Considering the Ivies rely very heavily on their endowments—more than a third of Harvard’s operating budget comes from its annual payout, compared to 11 percent at UVA—the latest reports have worried some. They prompted a New York Times story last week questioning the strategy now imitated by institutions the world over of diverse portfolios packed with slow-burn investments, pointing out that the model was on the whole outperformed by much simpler stock-centric investments over the last few years.

But Kochard said to get a true sense of how well the model works, you have to take a longer view. Harvard has had a 12.5 percent return over the last 20 years, and UVA can boast 12.1 percent. And with interest rates at all-time lows, more conventional and presumably safer investments just won’t pay off, he said.

That’s not to say what works at UVA will work everywhere, said Donald Lindsey, who worked on the University’s investment team in the ’80s and is now CIO at George Washington University. “The difference between one $5 billion endowment and another $5 billion endowment may be significant,” he said. “It really comes down to having a strong understanding of the institution as a whole and finding a model that works,” Lindsey said.

UVA seems to have done that. It’s always been what Lindsey called a progressive investor, with an early interest in diversifying. And you can’t forget that returns aren’t the only thing that grow endowments. Deep pockets do, too. “UVA has a very loyal alumni base, and they have been extremely successful in their fundraising,” Lindsey said.

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