Des Moines Register
02-25-07
Banker: Pay pros to run investments for schools
Endowments at the biggest universities in Iowa have below-average returns.
By ERIN JORDAN
REGISTER IOWA CITY BUREAU
Iowa City, Ia. - The endowments at the University of Iowa and Iowa State
University, worth close to $1 billion together, have earned lackluster returns in
recent years when compared with those at other universities in Iowa and across
the United States.
One U of I graduate, a Denver investment banker, says the endowments would
grow more quickly - and, in turn, provide more income for the universities - if the
schools replaced their volunteer investment managers with professional money
managers whose pay is tied to performance of the endowment.
"Would the U of I family be interested in a volunteer football coach and games
where the score is not kept?" asked Thomas Wolf, a 1986 U of I graduate. The
endowment's investment returns have averaged 6 percent per year during the
past five years, a performance that Wolf said concerns him.
The world's fastest-growing university endowments - think Harvard, Yale and the
Massachusetts Institute of Technology - have professional money managers who
decide where to invest the funds' assets. These endowments are all larger than
$1 billion, with Harvard's endowment standing close to $30 billion. Among the
country's 25 largest endowments, M.I.T.'s $8.4 billion endowment had the
greatest return on investment in fiscal year 2006, at 23 percent, according to a
Bloomberg survey.
Many universities believe it is too expensive for schools with smaller
endowments to pay upwards of $200,000 in salary and benefits for an in-house
chief investment officer who also would earn bonuses when the endowment sees
substantial growth.
"It has been discussed," said Tiffani Shaw, chief financial officer for the U of I
Foundation. "The committee feels that when we reach $1 billion, that will be a
time to have a serious discussion."
The U of I Foundation endowment, valued at about $584 million at the end of
fiscal 2006, earned a return rate of 7.4 percent last year, falling below the
Standard and Poor's 500 and the foundation's own benchmark.
The endowment's five-year annualized return of 6 percent is lower than the figure
of 7.4 percent for universities across the country with similarly sized
endowments, according to a report released last month by the National
Association of College and University Business Officers.
"We are not pleased with it," Cathy Zaharis, chairwoman of the U of I
Foundation's volunteer investment committee.
Zaharis, who worked 23 years as an investor at Principal Financial before
becoming a stay-at-home mom in Iowa City, said the committee constantly looks
for ways to improve the endowment's performance by changing asset allocation
or external fund managers.
The Iowa State University Foundation's endowment saw 8.5 percent returns in
fiscal 2006; it has averaged 6 percent returns in each of the last five years. The
University of Northern Iowa Foundation's endowment earned 14.8 percent
returns for fiscal 2006 and averaged 7.05 percent annual returns for the last five
years.
Universities use a variety of methods for managing their endowments. Some, like
the U of I, ISU and UNI, have volunteer investment boards that work with
external fund managers and sometimes consultants.
Grinnell College, which has the largest endowment of any college or university in
Iowa at more than $1.5 billion, has a chief investment officer and treasurer, Dave
Clay, who works with the Trustee Investment Committee to manage external
money managers.
A growing number of schools with smaller endowments have hired in-house
investors.
"There's an acknowledgment that the job has grown in complexity," said Jay
Namyet, chief investment officer for the University of Oregon. "No matter how
well-intentioned the trustees may be, it's tough for them to devote the time and
attention to it that I can."
Oregon's endowment has grown from about $200 million to $366 million in the
seven years Namyet has been money manager.
"When I look at the return on investment to having staff, it's the easiest
investment an institution can make," Namyet said.
Hiring and keeping talented in-house investors can be a challenge, financial
officers said, because universities pay much less than groups on Wall Street.
Lisa Eslinger, vice president for finance at the ISU Foundation, said she
thinks it would be hard to convince a top-tier money manager to take a pay cut
and move to Iowa.
But foundation officials like Eslinger are watching what happens with other
endowments and listening to people like Namyet and Wolf.
"There is some merit to what he's saying," Eslinger said of Wolf. "But it really is a
critical-mass issue. I don't think we're big enough yet."
Reporter Erin Jordan can be reached at (319) 351-6527 or ejordan@dmreg.com