THOMAS JEFFERSON, THE third US president, was a powerful advocate of liberty, including freedom of the mind. One of his most enduring projects after leaving office was the University of Virginia, which opened to its first students in 1825. The university, in Charlottesville, is built around Jefferson's "Academical Village" which is crowned by the library, a building inspired by Rome's second-century temple, the Pantheon.
In step with Jefferson's vision, the university's endowment managers have pursued freedom of the mind and made inspired moves in their efforts to ensure sound and high-yielding investment of the university's funds which, among other things, provide financial aid for students.
Sustained performance
Endowments are among the most cutting edge investors in the US. They were pioneers in investing significantly in hedge funds and remain big players in alternative asset classes. Their strategies are in part shaped by finance professors who want to put their theories into practice.
Under the management of the University of Virginia Investment Management Company (Uvimco),UVa's endowment has posted top performance at a time when other endowments have been hit by declining returns. However, Uvimco's long-serving CEO, Alice Handy, left at the beginning of the year and a replacement has not yet been found. There may be big changes in store.
From June 2002 to June 2003, UVa's fund returned 9.2% compared with a national average of 2.9% for US university endowments, according to the National Association of College and University Business Officers' (Nacubo) study of endowments for the financial year ending June 2003.
UVa's endowment had about $1.8 billion in assets at the end of 2003 and even managed to achieve more than double the rates of return of fellow institutions with more than $1 billion in endowment assets. The average return for these larger funds was 4.1%.
Of the 30 largest endowments in the US, the return for the UVa's in 2003 was second only to Harvard's. UVa's endowment is the fifth-largest public university endowment in the US and 23rd when both public and private institutions are included, according to Nacubo. Harvard has the nation's largest university endowment, with assets of about $18.85 billion at the end of 2003.
Leonard Sandridge, the University of Virginia's executive vice-president and COO, among whose roles is oversight of Uvimco, says: "[Our endowment] has had good results focusing on the long-term investor." He adds: "Our objective is to be solidly in the top quartile."
Much of the fund's success in 2003 can be attributed to its having been a good year for hedge funds and equities. UVa now has almost 60% of its endowment invested in hedge funds.
Sandridge views the hedge fund allocation as a play on equities, as 80% of the hedge funds in which the endowment is invested are long/short equity funds. The fund benefited from a good year for this strategy and for underlying equity markets. The CSFB/Tremont Hedge Fund Index shows that the average hedge fund investing in this way was up 17.27% for 2003.
A summary of UVa's board of visitors' discussion about the performance and market value of the endowment in February 2004 states: "With 60% in hedge funds, a portfolio that is little influenced by the direction of the market, the endowment did not fully participate in the equity market rally. The hedge fund portfolio returned 5.8% [for the six-month period], about in line with the lower end of the 12% to 15% annual return expectation."
UVa's fund also has a 6% allocation to domestic equities and a 9% allocation to international equities, as at the end of June 2004. For the six months to the end of 2003, the endowment's total return was 7.9%. The Russell 3000 Index, which represents around 98% of US domestic equities, was up 16.3% over the same six-month period. The MSCI All Country World Index excluding the US, which measures global developed and emerging-market equities, was up 27% over the same period.
The summary of the board of visitors' discussion last February states that: "The fund's more modest allocations to domestic and international equities outpaced their markets with returns of 17.3% and 37.9%, respectively. The oustanding international equity performance is primarily due to the decision to place those assets with emerging markets managers. The allocation to private equity, up 6.6% for the period, also served as a drag on performance."
Expansion into hedge funds
The university made its first foray into hedge funds in 1992. It increased its allocation to about 15% in 1994, an allocation which was maintained until 1998. Despite the endowment's having much more of its portfolio invested in hedge funds than many of its peers, Sandridge says the fund's managers do not consider themselves to be big risk takers. "We're not an organization that's always looking to be the first into a new field," he says. "Until 15 to 20 years ago the biggest decision was whether to put 65% to 75% in equity, and the rest into bonds. We grew conservatively and cautiously [into other investments]." He adds: "It's important not to be greedy. Making money is important but it's for the university."
Since 1974, the endowment's assets have grown from about $60 million to nearly $2 billion. "Most of the growth in the endowment is growth from performance," says Sandridge. "Gifts and additions are critically important but the real strengths are earnings and appreciation."
Sandridge says that two courses of action have proved to be outstanding – the fund manager's decisions in relation to its private-equity and hedge fund investments.
Since the early 1990s the fund has had a small proportion of its assets invested in private equity. In 2000 the allocation reached about 40% after sitting at about 4% for 10 years. This proved to be a highly profitable move for the fund. From June 1999 to June 2000 the endowment returned 43.8%.
After a good year for those investing in private equity generally, the fund began to take profit and reduce its allocation. So more by luck than design the fund got out at an opportune moment. Sandridge says: "When it appreciated so rapidly, 35% to 45% [allocation] was more than we wanted." According to the National Venture Capital Association and Thomson Venture Economics, US private-equity investment returns fell to –4% in 2000 and to –18.5% in 2001. Sandridge says: "We hedged our portfolio in early 2000 and ended up with a good portion of the $600 million rise attributed to private-equity funds."