Penn endowment continues to grow

Penn’s endowment is among the fastest growing in the nation.

According to a report released by Forbes last week, the University’s endowment growth ranks 22nd among the 32 universities with endowments valued at more than $2 billion.

The ranking pulled its data from a joint study published by the Commonfund Institute, a Connecticut-based investment firm, and the National Association of College and University Business Officers, which aggregates endowment data from more than 800 U.S. colleges and universities.

The Forbes ranking compared the growth in total endowment market value, which takes into account donor gifts, investment returns and expenses paid by the University.

By that measure, Penn’s endowment — the 11th largest in the nation at $6.58 billion as of June 30, 2011 — sits in the middle of the Ivy League, outgrowing Brown, Cornell, Dartmouth and Harvard while being outpaced by Columbia, Princeton and Yale.

Both Penn’s growth and its performance relative to its peers are products of a somewhat unique investment philosophy being pursed by the Office of Investment, which is headed by Chief Investment Officer Kristin Gilbertson.

Beginning in the 1980s and early 1990s, Penn’s peer institutions were hiring CIOs and starting investment offices to explore the new types of investments being minted at the time — including hedge funds, venture capital, real estate and other private equity. Penn was slower to adopt such measures and still had two-thirds of its portfolio in public equity when the University hired Landis Zimmerman — its first CIO— in 1998, according to Gilbertson.

Under Zimmerman, Penn began to diversify its portfolio. By the time Gilbertson took over in 2004, Penn had reduced its allocation in public equity to about half and increased its holdings in alternative investments — though still far less than other top institutions.

“We made the conscious decision not to rush to catch up with our peers,” Gilbertson said.

It was a strategy that seemed to pay off during the economic downturn. In fiscal year 2009, which ended June 30, 2009, Penn’s investments decreased 16 percent — compared to drops of 27 and 25 percent at Harvard and Yale, respectively. Harvard and Yale have the largest higher education endowments in the nation.

At the time, Penn’s high liquidity meant that it was able to temporarily invest in undervalued assets like credit hedge funds and distressed debt Gilbertson said.

In the time since then, however, Penn has seen gains more comparable to some of its peer schools, with investment returns of 19 percent for FY 2011 and 13 percent for FY 2010. Among other schools with endowments greater than $1 billion, average returns were 20 percent in FY 2011 and 12 percent in FY 2010, according to NACUBO.

And although Penn outperformed Harvard and Yale in FY 2010 investment returns, FY 2011 saw those schools once again overtake Penn. The University’s 10-year annualized return of 6.8 percent at the close of FY 2011 was also less than those of Harvard, Yale and Dartmouth, which saw 10-year returns of 9.4, 10.1 and 7 percent, respectively.

According to Wharton Finance professor Christopher Geczy, those numbers tend to fit with Penn’s general investment approach.

“I would say that we seem to be somewhat more tactical,” he said, noting that the endowment’s significant liquidity means it can take advantage of apparent opportunities and avoid higher risk.

Bill Jarvis, managing director of Commonfund, agreed.

“It appears that the board and investment office and investment committee have together made some decisions about the levels of volatility that they’re willing to tolerate,” he said. “That has led to less drawdown in the downturn and somewhat lower upside in good years.”

Ultimately, Gilbertson said, Penn’s endowment is still a work in progress. She hopes to continue to grow the University’s share of illiquid alternatives over the next five to 10 years, bringing the allocation for those investments closer to 30 percent of the total from their current 15 percent.

And like Jarvis, she emphasized that one year is just a benchmark.

“You can’t win in every single year in the endowment world,” she said. “We’re like farmers — we plant our crops and it takes the whole season for them to grow.”

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