Thank Goodness
One comment from Will Slack’s ‘11 excellent summary of Morty’s talk on the College’s financial situation deserves a post of its own.
How will this change the endowment management?
Thank goodness for Collete Chilton. Without her, we might be down 40% this year. Hedge funds are not asset boosters; they are compensation schemes (and I have no clue what this means). Williams is buying more commodities, which are not hedges in bad times. However, we’re still being conscientious. Williams had the chance to buy into a timber thing, and chose not to (Killing the Amazon, etc.), forgoing real profits. It’s not only how you spend the money, but how you raise it..
Let’s unpack these items.
1) I love the moral preening. Williams did not go for the Amazon timber deal so this means we have a conscious. Hah! Does Morty not notice that we have five percent of the endowment in emerging market equities and, most likely, some of those investments are in Brazilian companies? And not just warm and fuzzy Brazilian companies that sell native-made tchotchkes, but the sort of companies that are chopping up all those trees in the Amazon? Of course Morty (like me) does not know anything about the specific companies that the College’s managers invest in, but unless Williams has placed specific restrictions on its managers (unlikely), you can be sure that we have investments in unsavory companies around the world. Not investing directly in some Amazonian timber does not mean that we aren’t profiting from logging and other depredations that Williams People Do Not Like. Recall the similar preening over Sudan divestment.
2) With regard to “compensation schemes,” Morty is probably referring to the fact that hedge funds generally charge much higher fees than traditional asset managers. (The College has 10% of its endowment in “Absolute Return” strategies, almost all of it in hedge funds. The compensation scheme for all the of the College’s Private Equity (9%) or Venture Capital (6%) allocations are almost certainly similar.) These fees generally have two parts: a management fee (1%-2%), which is just like the fee that you pay on your mutual fund, and a performance fee (around 20%), which is only paid on the profits over a specific benchmark. People who argue that hedge funds are “compensation schemes” generally believe that those fees are too high, that hedge funds don’t perform nearly well enough to justify taking such a large portion of the profits and that much of their success is a bull market phenomenon. The same arguments are made against private equity and venture capital.
But, guess what! Morty can solve this “problem” easily. Just pull all the endowment money out of hedge funds, private equity and venture capital. Problem solved! But recall (pdf) how trustee Dave Coolidge ’65 describe things last year.
We set our allocation targets for each asset class annually and over the last few years have increased our allocation to hedge funds, real estate, and international equities, while reducing our allocation to domestic equities and bonds. The Investment Committee recently completed a thorough review of the asset allocation policy for the endowment. The Committee adopted a revised policy that will continue to provide an appropriate return for the College with less risk by diversifying into more asset classes. Figure 3 shows our summary asset allocation policy as of July 1, 2007.
So the College, just last year, decided to add more money to hedge funds, organizations that Morty now describes as little more than “compensation schemes.” Did Morty miss that meeting? Has recent experience caused him to change his mind? Will he be proposing that the College decrease the percentage of the endowment dedicated to hedge funds in the future?
I doubt it. I think that this was Morty as wise guy rather than wise man (to steal Mark Taylor’s put down), Morty playing to the crowd and criticizing hedge fund managers even though he (and Williams) remain eager clients.
3) Is it really true that, without Collete Chilton, the Williams endowment would be down 40%? No. That’s absurd. Morty can only get away with howlers like this because there is no one in his audience knowledgeable enough (and willing) to call him out. I doubt that this talk impresses members of the Investment Committee. Some of whom, I have heard, are not Chilton’s biggest fans.
How can I be so sure that Morty is exaggerating Chilton’s contribution? Mainly because she has not been in her job long enough to make major changes in either the College’s asset allocation or in its manager selection. Recall that she started work in the fall of 2006. The College’s asset allocation policy was either already implemented or well on its way to implementation. Might Chilton have had an impact on the margin? Sure. But the College’s endowment looks more or less like it would have even if she had not been hired because it looks more or less like it has for a decade. (More on this latter.)
Leaving aside asset allocation, Chilton has not had time to significantly change many of the specific managers that Williams has hired within the different asset categories. You really think that, first day on the job, she fired all the College’s old managers and hired a bunch of new ones?
Again, Morty is 95% a straight-shooter, more honest and direct than the vast majority of college presidents. Moreover, every president needs to hedge a bit, praise in public while criticizing in private. But ridiculous claims about Chilton’s contributions are not helpful. They cause financially sophisticated alumni to doubt everything else that Morty has to say, to wonder if something else is going on, to worry that Morty is too-invested in his let’s-copy-Yale-and-hire-a-Swensen-clone plan to realize that the whole scheme is a mistake.
I was talking with a very rich, plugged-in alum a few weeks ago, someone who can get a meeting with Chilton (or Morty) whenever he feels like it. After talking with Chilton about the endowment, his first reaction was, “What is she hiding?” After further discussion, his opinion is “Don’t expect me to make a big donation for a major reunion if you have some idiot managing the endowment.”
Those are paraphrases. Although I have a reputation as a Chilton-critic, I was truly surprised at the depth of this alum’s dissatisfaction. Perhaps he is an outlier. Perhaps all the members of the Investment Committee are, with Morty, thanking goodness that Collette Chilton is managing the Williams endowment.
My position is the same as always: Williams should close the Boston investment office. It is too expensive and serves no necessary purpose. No one, least of all Chilton, should be fired. They should all have the option of moving to Williamstown. With luck, most of them won’t.
Best Practices for the Endowment
I had an interesting discussion with a Williams administrator yesterday with regard to
my concerns about the endowment. No one expects Chief Investment Officer Collette Chilton and the Investment Committee to work miracles. But they should be able to adhere to a set of best practices as exemplified by peer institutions. To be specific, consider The Boston Foundation (tBf), led by former Williams trustee Paul Grogan ‘72, and Wellesley College. Both organizations do a fine job with resources similar to those of Williams. Which best practices should Williams emulate?
1) Quarterly reporting. Consider this webpage and pdf from tBf. Given that Chilton and her staff compile quarterly reports for the Investment Committee, there is no excuse for not sharing that information with the rest of us.
2) Manager transparency. Consider the explicit listing of Boston Foundation managers.
Note that there is not complete transparency here. In particular, we do not know which private equity and venture firms tBf invests in, much less which specific funds sponsored by those firms. That’s a complex issue which we can save for another day. But there is no excuse for Williams not to tell us which firms it uses to manage the standard equity and fixed income portions of the portfolio.
3) Clear asset allocation, benchmarks and category performance.
The Boston Foundation provides its asset allocation here. As discussed previously, Williams makes public its asset allocation policy, but we have little idea which benchmarks it uses to measure manager performance nor how well those managers have done, at least in aggregate. Consider the 2003 Report (pdf) from Wellesley.
There are two components to endowment returns. First, what categories were the funds allocated to? An endowment that is 75% in equities will perform very differently than one which allocates only 25% to equities. Second, which managers are selected within a given category? Two endowments can both allocate 50% to equities (as Williams does) but their performances can differ dramatically depending on which managers each selects. There is a case to be made that the performance data for a specific manager should be kept secret. But there is no excuse for not doing as Wellesley does above and reporting the aggregate performance of the managers within each specific category of the overall asset allocation.
Again, it would be one thing if reporting this information to the Williams community were a major burden to Chilton and her staff. Transparency is valuable, but not at any cost. However, every single piece of information (manager identity, asset allocation, benchmarks and relative performance, all on a quarterly basis) is already collected and reported to Morty, the Trustees and the Investment Committee.
Best practices require that Williams share that information with the rest of us.
Shocked
A Eph working in finance writes about a recent Record interview with Morty.
Did you see this?
I’m shocked. I had no idea that Collette had lost so much of our endowment ($500M+). Plus, Morty sounds like he’s panicking. The fact that he doesn’t have a good grasp of the school’s finances AND that he used the phrase ‘brink of bankruptcy’ in a Record interview has me seriously reconsidering Morty’s competence at a time we need someone good at the helm. Either Morty is playing up the situation a little to try and good more donations or the college has seriously overextended itself.
1) You shouldn’t be “shocked.” With an 50% allocation to global equities, it is impossible for the Williams endowment to escape serious damage during a market meltdown. See our previous discussions.
2) Are we reading the same interview? Morty doesn’t sound panicked at all. In fact, he seems his always highly competent and (too?) honest self. This is one of the many things that I love about Morty! Consider the bankruptcy quote in context:
So, there are no plans to lay off any faculty or staff?
If we get to the brink of bankruptcy, who knows what’s going to happen? But as things are going, no plans for that … We come up with an attrition rate of seven faculty and 10 staff per year, which is lower than what it’s been. All over American outside of academia, people are being fired. Even within academia they’re being fired left and right. We’re the major engine of economic activity in the northern Berkshires. We talk all the time about how it’s not just the faculty are educators, but the staff as well, and they need us most when many of their partners or spouses are being laid off. Is this the time when we should lay them off too, or are we serious about the family and the community? I think we’re serious.
Morty is making it clear that, if the endowment levels off at $1.3 billion or above, there will be belt-tightening (no more visiting professors) without real pain (lay-offs). But, obviously, if the endowment falls further or stay flat for long enough (the Japan scenario), all options are on the table.
3) “[R]econsidering Morty’s competence” is absurd. It is hard to imagine a better leader to see Williams through a (potential) economic crisis. As you note, Morty may also be emphasizing the difficulties so that people start cutting costs seriously. (Please don’t tell me that the College is going to pay for a trip to DC for the Obama inaugural.)
4) It’s somewhat frustrating that some people (not this Eph) perceive me as a big Morty critic when, in fact, I am a huge fan. 95% of the decisions that Morty makes are correct. And the 5% that (I think) he gets wrong are often more a matter of tactics than ultimate goals. Yet I write much more about the bad staff than the good stuff. Let me rectify that my pointing to that Record interview. Read the whole thing. Morty is right about the challenges Williams faces and the best methods for confronting them.
5) The more subtle question is: What signs/decisions would make me rethink my faith in Morty? What evidence would falsify my hypothesis that he is a great Williams president? An easy question! A failure to start cutting costs in a serious fashion. Although it may be too late to do much with the 2008-2010 budget, Morty needs to start making tough decisions now that will contain the operating budget to zero growth for the next two years. If he doesn’t, I’ll start to worry that Morty is a just great fair weather president. When tough choices were called for, he failed to make them. Let’s all hope it doesn’t come to that. Popperian falsification is much more fun in theory than in practice.
View From The Bottom
The last major bear market in the US bottomed on October 8th, 2002. How did things look to Williams on that date? See here.
Endowment has shrunk, outlook still optimistic
Archived Edition: October 08, 2002The College’s endowment has decreased by approximately $300 million since June 30, 2000. As of June 20, 2002, the College’s endowment stood at $1,033,983,766, while total investments, including the endowment and other miscellaneous financial resources, were valued at approximately $1,189,003,764.
Christopher Wolf, manager of investments and treasury operations for the College, acknowledges the recent decline in the value of the endowment, but also “prefers to focus on the long-term.” Within the last 10 years, the College received a compound annual average return of approximately 15 percent.
An annual return of 15% is the very definition of “unsustainable.”
Each year, the College “plan[s] on using [between] four and five percent of [its] endowment…on average we assume [that] we will earn nine percent on our endowment and receive new gifts to the endowment of one percent of its value,” Catharine Hill, provost of the College, said. “These past two years, we experienced negative returns … leading to declines in our endowment. But given the very high returns during the late 1990s, our endowment is still very strong and our average return over the last decade [has] exceeded our [expectations].”
Indeed. But spend enough time in a bull market and your expectations have a way of changing. Is it plausible to assume that new gifts (including capital campaigns?) will equal 1% of the endowment annually? I don’t know.
The Finance Committee of the Board of Trustees is charged with managing the disparate assets that belong to the College that are generally referred to as the endowment. While planning to increase fundraising efforts to support campus renovations, the Committee expects the endowment to earn nine percent interest each year despite the current state of the nation’s financial markets.
The College now only forecasts 8%. Are we more realistic? Depends of what inflationary expectations are built into that nominal forecast. If the old inflation expectations were 4%, the forecast real returns are unchanged at 5%.
“Due to our financial strength and extensive alumni network, the College has been able to invest in world-class money managers over the years, including private equity partnerships and hedge funds,” said Wolf.
Exactly right. In the old days, connected trustees ran the endowment and made sure that Williams got into some great deals. Now Collette Chilton runs the endowment. Do the trustees and other alums in finance spend as much time on the endowment as they used to? No. Do they work as hard to get Williams into the best deals? Maybe, maybe not. The less power/responsibility you give someone, the less dedicated to the project they become.
At what point will Williams consider closing the Investment Office in Boston and moving that responsibility back to Williamstown? You don’t need to fire anyone. Employees ready to move would be welcome to do so. But, if we are serious about cutting costs, then high-priced Boston real estate is a good place to start. The Investment Office would function just as well (and perhaps better) in Williamstown as it does in Boston.
The College has already allocated much of the funds needed for the large scale renovation projects scheduled for the coming decade. Wolf emphasized that it is important to “keep in mind that while [the College’s] investments increased roughly 15 percent a year for the last ten years, spending only increased six percent a year…during that period we were ‘saving for a rainy day.’”
Has the College done enough saving for a rainy days in the 6 years since? Not that I can see. The College was smart (or, at least, accurate) to be “optimistic” at the very bottom of a vicious bear market. Is Williams optimistic today? Should it be?
Cycle or Spiral?
I vote/hope cycle.
Williams alumni, faculty, and staff will discuss implications of the turmoil in world financial markets on Thursday, Oct. 23, at 8 p.m. in Chapin Hall. The session, which is free and open to the public, is titled, “Cycle or Spiral?: Financial Markets in Crisis.”
“We’re fortunate to have in the Williams family financial professionals and academics with such extraordinary depth and range of experience to help us understand better an issue of urgency to the world,” Williams President Morton Owen Schapiro said. “I look forward to hearing their insights.”
Alumni participants will be Paul Isaac ‘72, principal of Cadogan Management, and James Lee ‘75, vice chairman of JPMorgan Chase & Co. and Co-Chairman of its Investment Bank. Campus participants will be Collette Chilton, chief investment officer, Gerard Caprio ‘72, professor of economics, and Kenneth Kuttner, professor of economics. Moderating the session will be Stephen Sheppard, professor and chair of economics.
Kudos to whoever arranged the event and to Ephs like Isaac and Lee for traveling all the way to Williamstown to participate. It is either a very good or very bad sign for the global economy that Jimmy Lee has this much free time. Comments:
1) Does Jimmy Lee really look like an alligator?
2) Attendees should feel free to borrow some questions from here, especially 2) and 4).
3) Again, the most important financial question facing the Williams endowment is whether or not to rebalance.
4) Question: “Given what we now know about the volatility of the financial markets, was it wise for Williams to issue $267 million worth of bonds? And, assuming that we now recognize that as a mistake, when do you expect the College to be debt free?”
Rebalance?
What is the most important financial decision facing Williams right now? Whether or not to rebalance the portfolio because of market turmoil. Recall our discussion of the College’s asset allocation. Williams has 50% of its endowment in equities, slightly more than half of that in the US, benchmarked (I think) against the Russell 3000. You can check the performance of the Russell 3000 by looking at its exchange traded fund, IWV.
The Russell 3000 is down more than 25% since June 30. International stocks are down, if anything, even more. (I think that the College uses MSCI EAFE (down 38%) as a benchmark for its 18% allocation to non-US developed markets. MSCI EM (down 47%) is probably the benchmark for the 5% in emerging market equities.)
Assume that the College met its asset allocation plan as of June 30th. That would imply an investment of approximately $900 million (50% of the $1.8 billion endowment) in global equities. Given weighted losses of around 31% and ignoring either over or under performance by the College’s investment managers, this means that the College has lost around $300 million in its equity investments in the last 15 weeks.
Ouch!
Yet, today, Chief Investment Officer Collette Chilton is not worried about the money that has been loss. She is focused on what the endowment should look like going forward. Should the College rebalance in response to these dramatic swings? Should it buy more stocks to bring the actual allocation back to the target? Yes. Will it? Depends on if Collette Chilton knows what she is doing.
Yale CIO David Swensen tells the story (page 329 in Pioneering Portfolio Management) of Yale’s response to the stock market crash of 1987. Yale bought stocks and sold bonds in order to bring its asset allocation back in line after stocks had fallen and bonds had risen. Swensen explains how disciplined adherence to a long-term asset allocation plan forces endowment managers to buy low and sell high. He also points out that this is very hard to do. The natural reaction after stocks fall is to sell.
Assume for the moment that other parts of the Williams endowment have stayed constant. (This is almost certainly false.) The 30% fall in equities means that, instead of having 50% in equities overall, Williams now only has 40% — $600 million out of a total endowment now at $1.5 billion. We need to invest another $150 million in equities to get back to 50%. This is what it means to buy low. Williams could do this via futures at relatively low cost, without (temporarily) cutting back on other investments.
Are we doing that? I doubt it.
Now, to be fair, it is also reasonable at this point to stand pat. Other parts of the endowment are probably down significantly as well. Williams may be down $600 million for the fiscal year at this stage. (That’s a terrifying topic for this week-end’s meeting of the Trustees!) If true, then our $600 million exposure to equities is consistent with the asset allocation target of 50%. In that case, there is no need to rebalance.
Endowment Q&A
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?
Endowment Flipping
I worried about the College’s borrowing two years ago. The College had, at that time, $1.5 billion in the bank. Why would/should it borrow money (by selling bonds) rather than just spend some of the endowment? A commentator responded with:
Because Williams’ cost of equity is higher (i.e. return on the endowment) than its cost of debt. Especially if the interest paid is tax exempt.
Come on Kane, don’t you work in finance?
This is the logic of the condo-flipper in Fort Myers. As long as the endowment keeps on going up by more than the interest we pay on the bonds, Williams has a money machine! Why not just borrow $100 million and invest it in the endowment itself? We pay 3% in interest but make 10% in returns. Presto! The 7% spread means that Williams has made $7 million, and at no risk! Even better would be to borrow $1 billion and invest in the endowment. Then we make $70 million a year, enough extra to make tuition free for all!
The problem, obviously, is that endowment returns aren’t always positive, as folks with more than a year or two in finance realize. Leverage is a dangerous thing, for both hedge funds and small liberal arts colleges.
What impact has this sort of stuff had on our finances? I don’t know. Here is a listing of outstanding bonds and here are recent ones. Would all Williams debt be listed here? Is there an easy way to aggregate the total amount? Consider two bonds (the largest?):
Williams College $36,000,000 Bond Issue 01/04/2007
Williams College $71,160,000 Bond Issue 01/04/2007
How much interest does Williams pay on these bonds? If it is 3%, and the endowment lost 5% in the year through June 30, 2008, then this magical bit of financial engineering has cost the College $8 million. Well played, Collette Chilton!
Now, that is not fair. Williams was borrowing money long before Collette Chilton showed up. She almost certainly does not set policy on her own. The Trustees (along with the Investment Committee) sign off on any new debt. Yet the central fact remains that borrowing money when you have $1+ billion in the bank is a suspect exercise. In a bull market, leverage makes you look like a genius. In a bear market, it blows you up.
So, for starters, how about some transparency from the College? How large is Williams’ debt? What interest rate does it pay? What are the plans for reducing/increasing it?
UPDATE: Thanks to HWC for pointing out that the College’s Form 990 includes relevant (albeit out of date) data. Look at page 14 of this pdf.
It seems that, as of June 30, 2005, the College had $170 million in debt, at various interest rates. Has this debt been (partly) paid off via recent debt issues? Note that 2005 debt includes Series E through I. The two bond issues above are Series L and M. Looking again at the listing of outstanding debt, it looks like some of the previous debt was retired and some new added. Consider:
Williams College E 5/18/1993 22,000 13,800
Williams College G 6/29/1999 9,255 9,255
Williams College H 4/1/2003 42,850 39,630
Williams College J 4/3/2006 33,065 32,783
Williams College K 4/3/2006 39,700 39,700
Williams College M 1/7/2007 36,000 36,000
Williams College L 1/7/2007 71,160 71,160
We have the Series, the issue date, the issued amount and the amount outstanding (both in millions). Call it $240 million in debt. Assume the interest rate is 3%. (Is that reasonable?) Since the endowment lost 5% last year (and is almost certainly down again since June 30), we are looking at a $19 million loss.
Time to pay-off the debt or double down?
UPDATE II: Thanks to HWC for this link to the College’s financial statements.
Endowment Return: -5%
Curious how the Williams endowment is doing? David asked about this earlier, and even came up with a forecast, but now we have some actual numbers. The Record reports, in an annoyingly vague fashion, that the total value of the endowment dropped 5% between June, 2007 and June, 2008. There is no information at all as to how much of this loss can be attributed to increased expenditure, a slowdown in donations, or market losses.
The Record reporter throws in references to general market events that may or may not have had a direct impact on endowment performance. It would be nice to see a little more transparency regarding the actual asset classes the endowment is invested in, and how each segment of the portfolio performed. Also, it would be interesting to see what Collete Chilton might have to say about the College’s investment strategy, lessons learned in the last year, or ongoing hiring/firing of money managers.
Such transparency would be far more helpful than the kind of vague comments we get from Ms. Chilton. I suppose it’s too much to ask reporters to actually dig for answers as opposed to merely taking down dictation from administrators. I mean, yes, I realize that Record writers are basically unpaid volunteers working on tight deadlines, but this article betrays an unbelievable lack of curiosity on the part of the Williams Record. The endowment is incredibly important to the functioning and growth of the college, and yet I have seen press releases that are more incisive than this write up.
That being said, this must rank among the most valuable internship opportunities available to any Williams student - kudos to the investment office for putting it together:
This summer marked the inaugural year of the investment office’s summer internship program. Beginning with a structured training program in June, the interns – Rick Devlin ’09 and Caitlin McGugan ’09 – spent about nine weeks working full-time with the investment office, after which they “spent the summer learning all aspects of endowment investment management,” Chilton said. “The interns had the opportunity to see all parts of the investment program for the College.”
Endowment Modelling
It is tough, but not impossible, for outsiders to know what is going in the Williams endowment. Start with the basic asset allocation as described on page 3 of this pdf. (Comments welcome on whether or not this is a sensible plan.) Find benchmarks (publicly traded ETFs) for each of the asset classes. We don’t know if the managers picked to run Williams 27% allocation to domestic equities will do better or worse than, say, the Russell 3000 but, as a first pass, we can just assume that all managers meet their benchmarks.
Here is a pdf and xls version. My back-of-the-envelope guess? The Williams endowment was down -2.4% in fiscal year 2008 (ending June 30). Comments:
Read more
Investment Office Update
The College’s latest list of hires includes Bradford Wakeman in the Investment Office. (Previous discussion of the investment office and Wakeman here. Note that we are the top two hits on Google for Collette Chilton. Beware the power of EphBlog.)
Regular readers, of course, knew about Wakeman’s hiring three months ago. More recent news, judging from this handy list of the Investment Office staff, involves the addition of two Investment Analysts to the Boston office: Abigail Wattley ‘05 and Claire Woolston. (Congrats to Wattley on her upcoming Eph wedding.)
Sources in the old, rich Eph-boy network report that the plan is for the Investment Office in Boston to have a staff of 6 besides Chilton. With Corrigan, Wakeman, Wattley and Woolston, the hiring is almost complete. These folks will soon have a large amount of control over more than $1.5 billion. The Record ought to write on this topic.
Collette Chilton: Money Woman
Great New York Times article (free version here) on David Swensen, “Yale’s Money Man.”
News of windfalls on Wall Street have become as common and unsurprising as rain: traders collect $50 million bonuses, top hedge fund managers haul in more than $100 million in a single year. In such gilded company, annual compensation of $1.3 million looks paltry. Yet that was how much David F. Swensen took home in 2005 for supervising Yale University’s endowment, now worth $20 billion.
Mr. Swensen, one of the most well-regarded investors in the country, never appears on lists of the most highly paid money managers. Nor has he made headlines by buying expensive homes in New York or Palm Beach or by frequenting cocktail and charity circuits. But in the competitive, performance-driven world of money managers, Mr. Swensen can boast of an extraordinary record.
During his 21 years as steward of the Yale endowment, Mr. Swensen has generated an annual compound growth rate of 16.3 percent, beating the performance of Harvard’s endowment and that of every other major school in the country over the same period, according to data compiled by Yale. Over the years, he has also routinely rebuffed lucrative offers to leave Yale and to cash in on his expertise in a much grander fashion.
“People think working for something other than the most money you could get is an odd concept, but it seems a perfectly natural concept to me,” says Mr. Swensen, a slender, soft-spoken man who looks and dresses like a high school teacher. “When I see colleagues of mine leave universities to do essentially the same thing they were doing but to get paid more, I am disappointed because there is a sense of mission,” in endowment work.
Swensen’s record at Yale is impressive although skeptics will note that it is difficult to know how much of this is due to Swensen and how much to the Yale name. Jack Meyer’s performance at Harvard was similarly excellent, but Meyer has not done nearly as well since leaving Harvard behind. Note:
But within the clubby money management world, a Yale investment is akin to a seal of approval, and managers avidly court Mr. Swensen. They describe him as a thorough researcher who, with his team, scrutinizes his choices intensely before committing money.
In other words, it is much easier for Yale to invest in an opportunity because the investment manager can then use Yale’s presence to court other investors. And, since Swensen is smart, he uses this leverage to get a much better deal for Yale than is available for others. Could Swensen get the same sort of access if he didn’t have the “Yale” on his business card? I doubt it.
Like many hedge funds, Farallon charged a 1 percent management fee and took 20 percent of the profits. “David told us: ‘I don’t see why we would give you any money. You might shut down after a bad year,’ ” Mr. Steyer recalled.
It was only after Mr. Steyer swore that he wouldn’t shut down — and that he wouldn’t immediately charge Mr. Swensen 20 percent of his profits and other fees — that Mr. Swensen gave Mr. Steyer some of Yale’s money.
The Eph connection to any of this? See below.
New CIO
Williams has a new Chief Investment Officer.
Williams College has put the final piece of the upper level management in place, hiring Boston-based investment executive Collette Chilton as its first chief investment officer to oversee its roughly $1.5 billion endowment.
Chilton is president and chief investment officer of Lucent Asset Management Corp., which manages the pension and 401(k) funds of the telecom corporation Lucent Technologies Inc.
Hmmm. I have been somewhat suspicious of the move to hire a CIO. Why mess with a system that is working well? Moreover, as Trustee Laurie Thomsen pointed out at the Boston Alumni meeting in April, the real secret behind the success of the endowment has been the committee of Ephs who have run it. They have ensured that Williams gets into all the best deals. Presumably, this will continue, but I worry.
Chilton certainly has the sort of resume that one would look for. (She was probably due to be forced out of Lucent as Alcatel takes over in the next year.) And, even better, her non-trivial salary will make other administrators seem cheap by comparison. She talks sense in this interview.
CPEE: What impresses you in a job candidate?
Chilton: People in an interview situation need to have a clue about what they are talking about! You would be surprised at how many people just haven’t done the research and don’t even understand the job they for which they are interviewing. People come in and don’t really know the role investment managers play within a company, or what assets we oversee–really basic stuff.
One thing not to do is to come in and say, “I’ll take this entry-level job for now, but in two years I should have your job!” Job candidates have to have a clear, realistic sense of what they want to do, both short-term and long-term.
Very true. The Eagle goes on with:
The post was created by the reorganization of the school’s upper-level management, which has been ongoing for a year.
Chilton said that having an investment office is important when you have enough assets to oversee.
“Having someone whose responsibility day in and day out is to oversee and invest it and all the myriad details that go with that is more than a full-time job,” she said.
Then why was the endowment’s performance over the last 10 years so outstanding?
“They clearly did an outstanding job (resulting in double-digit annual growth), but the volume and complexity of overseeing an increasingly large portfolio rendered that model unsustainable,” President Morton O. Schapiro wrote in a letter making the announcement. “With a chief investment officer, Williams will for the first time have an experienced professional overseeing on a day-to-day basis an operation of great importance to all that we do at the College and all that we’ll be able to do in the future.”
Perhaps. As long as the focus continues to be on getting access, via plugged in Ephs on the Finance Committee, to the best deals, I am satisfied. Indeed, Chilton might play a useful role as score-keeper, reporting on which deals have paid off the best for the College. Rich Ephs can be quite competitive in their desire to do well for Williams.
At about $1.5 billion, the college’s endowment is one of the largest in the nation for a small liberal arts school.
There are some limits to how the money can be invested. In June, the trustees chose not to invest in 28 multinational corporations that do business in Sudan, as part of an effort to stop the government-sponsored genocide in that country’s Darfur region.
Gibberish! The Eagle reporter, Chris Marcisz, is smarter than this. The trustees chose not to invest directly in these companies. The College has so few direct stock holdings that this doesn’t matter. The College did not promise to stop investing in hedge funds and other pooled vehicles which themselves invest in companies which do business in Sudan. For all anyone knows, those hedge funds have millions of dollars invested with those companies.
The entire Sudan Divestment schtick is moral preening, devoid of investment substance.
Best part is that Alcatel — the company that is in the process of buying Lucent and, I think, indirectly leading to Chilton’s departure — is on the Sudan list! Maybe Chilton quit for moral reasons! She couldn’t stand the thought of working for a company which does business with the government of Sudan.
She’ll be based in Boston and will have an office at Williams.
I am jealous.
