$2.3 billion endowment outperforms market benchmarks by 20 percent

by Skip Anderson

The University's financial portfolio performed exceptionally strong over the past year, yielding a staggering 31.92 percent return and ending fiscal year 2000 at $2.3 billion, according to Vanderbilt officials.

"Typically, if you outperform the market by 1.5 percent, then you've done very well," said William T. Spitz, vice chancellor for investments and treasurer. "Last year we beat it by 3.6 percent and thought that was awesome. This year we outperformed our customized benchmark, which is a blend of market indices for each of the categories that we invest in by more than 20 percent."

Spitz attributes the boon to Vanderbilt's investment strategy, which differs from the model frequently used by many investors and institutions.

"A traditional asset mix of 75 percent U.S. stocks, 10 percent non-U.S. stocks and 15 percent bonds would have generated a return of 8 percent," he said. "The difference between the 8 percent return and our 31.9 percent outcome is largely a function of our private equity portfolio."

Though the current numbers from the top 25 colleges and universities (determined by investment pool market) have yet to be fully reported, a recent study by Cambridge Associates indicates that the preliminary mean for asset allocation into venture capital and private equity was 8.1 percent. Vanderbilt's was 21.8 percent.

"For this year, our return on our venture portfolio was 178 percent," said Spitz. "That really has been the engine of our endowment fund over the past few years."

Venture capital and private equity investments are used to fund upstart companies or purchase more mature companies respectively. According to Spitz, upstart companies funded in part by Vanderbilt's endowment include Yahoo, Netscape, America Online, Amazon.com, Cisco Systems, Juniper Networks, Lycos, Excite and E-toys.

Vanderbilt's endowment, which ranks 19th in the country in terms of size, was allocated into 10 investment categories for fiscal year 2000: U.S. equities (25 percent), international equities (10 percent), emerging market equities (5.6 percent), venture capital (16 percent), absolute return strategies (15.3 percent), private equity (5.6 percent), real estate (3 percent), energy and timber (1 percent), TIPS (a type of U.S. government bond, 3.7 percent), fixed income (12.2 percent), cash (1.4 percent) and mortgages/advances (1.2 percent).

An institution's endowment is frequently used in several formulas to judge the financial health of a college or university. For instance, the University ranks 19th in endowment value, but ranks around 60th when the endowment is divided by the number of students, which roughly translates to $220,000 per student at Vanderbilt. Comparatively, Princeton University's endowment of $8 billion translates to around $1 million per student, Spitz said.

He said there are three ways to gain ground on other institutions, which is one of Vanderbilt's long-term goals: get more gifts, get better returns on investments and reinvest more of the returns.

"Several years ago Vanderbilt consciously decided to spend less in an effort to close the gap against other institutions," he said. "And our returns on investments have been exceptional. We're on the right track."

Spitz said that the endowment funds only about 5 percent of Vanderbilt's annual operating budget of $1.2 billion, the bulk of which comes from Medical Center revenues, tuition, government grants and donor gifts.

"The goal of the endowment is to hand it over to the next generation with at least the same value -- adjusted for inflation -- as when you inherited it," he said. "That way, a $1.5 million endowed chair, properly invested, will continue in perpetuity."

The management of the endowment is overseen by the Investment Committee, comprised of Chancellor E. Gordon Gee; Martha Ingram, board of trust chairman; trustees Eugene B. Shanks (committee chair), Dennis C. Bottorff and Eugene H. Vaughan; and three alumni with specific areas of expertise, Bruce Evans, Amy Jorgenson and Mike McCarty.