Endowment outperforms benchmarks in bear market

by Jessica Howard

The downturn of the stock market led to a 4.7 percent decrease in the University's endowment portfolio, ending fiscal year 2001 at $2.16 billion. University officials said the decline from last year's $2.3 billion endowment market value is no cause for alarm.


Total Endowment Market Value

2001 $2.16 billion

2000 $2.3 billion

1999 $1.8 billion

1998 $1.5 billion

1997 $1.3 billion

1996 $1.1 billion

1995 $953 million

1994 $838 million

1993 $801 million

1992 $669 million

1991 $612 million

Source: William T. Spitz


Despite a troubled market, the University's endowment still outperformed its customized benchmark by 2.4 percent for FY 2001, which ended June 30. The benchmark combines market indices for each of Vanderbilt's 10 investment categories.

William T. Spitz, vice chancellor for investments and treasurer, indicated that this year's U.S. stock market was down 15 percent, and international equities markets were down 24 percent.

"It was a terrible environment generally," he said. "But, we shouldn't be surprised given that we had enjoyed a number of years of above-average returns."

The nosedive in the market value of technology stocks resulted in low venture capital returns in FY 2001, yet venture capital investments were the driving force for the unprecedented performance of the University's endowment the previous year. In FY 2000, Vanderbilt's private equity portfolio had a 129 percent return. This year, the University's private equity portfolio suffered a 30 percent loss, reducing the performance of the endowment.

"In the last few years, [the private equity market] was an excellent place to be," said Spitz. "Last year, it was a horrible place to be."

Most of Vanderbilt's portfolio components did much better than market averages. The international equity fund rose 6.5 percent, whereas the benchmark MSCI EAFE Index fell 23.6 percent; Vanderbilt's U.S. equities fell 0.3 percent, as compared to the 15.2 percent decline in the Wilshire 5000 Index; the global equity portfolio fell 14 percent versus a 20.3 percent decline on its benchmark.

"We try to hit singles and doubles," Spitz said. "We will gladly give up the opportunity to hit home runs in return for a low probability of striking out."

The University's investment strategy is akin to those preached by financial advisers for years: diversification. For example, private equity provided the best returns in FY 2000, while government bonds were the strongest performers in FY 2001.

"We are down, but we structured the endowment to do well in a variety of environments," said Spitz. "Some components of the fund do quite well regardless if the outlook is not so great. I think [the endowment] is well positioned in the long term."

The endowment return for the first quarter of FY 2002 showed an estimated 8 percent decrease. Three other quarters yielded worse performances than this most recent quarter in Spitz's 16 years at the University. The worst was during the stock market crash in 1987 when the fiscal year's fourth quarter was down 11.7 percent.

A portion of Vanderbilt's endowment is used as a revenue stream for the University. Last year, it provided $84.7 million, 6 percent of the total operating budget, which was an increase of 22.5 percent over the previous year.

The endowment supports a variety of programs and purposes: school operations ($24.7 million), scholarships ($20.2 million), faculty chairs ($16.4 million), general operations ($14.3 millions) and faculty support ($9.1 million).

In fiscal year 2002, Spitz said the endowment's contribution to the operating budget has increased an additional 9.6 percent.

Vanderbilt's asset allocation was as follows on June 30, 2001: U.S. equities (27 percent), global equities (11 percent), international equities (6 percent) emerging market equities (6 percent), private equity (11 percent), bonds (15 percent), treasury inflation protected securities (4 percent), absolute return strategies (15 percent), real estate (4 percent) and timber and energy (1 percent).

Vanderbilt's endowment return of negative 4.7 percent for FY 2001 compares to a median return of negative 3.5 percent for colleges and universities participating in the Cambridge Associates survey.

Steadiness is key in maintaining a healthy endowment, and long-term numbers point to strong annual returns, said Spitz. Vanderbilt's three-year return of 14.6 percent compares favorably to the median return of 7.2 percent for colleges and universities.

The management of the endowment is overseen by the Investment Committee, comprised of Chancellor Gordon Gee; Board of Trust Chairman Martha Ingram; trustees Eugene B. Shanks Jr. (committee chair), Joe L. Roby and Eugene H. Vaughn; and three alumni with specific areas of expertise: Bruce Evans, Amy Jorgenson and Mike McCarty.

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