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Questions & Answers About the Rensselaer Endowment
During this global economic crisis, institutions of higher education, including Rensselaer, are seeing declines in their endowments. A strong endowment positions Rensselaer to respond to new and emerging opportunities, and keeps the Institute on secure financial footing. Supporting the Rensselaer endowment is essential, and increasing the base size of the endowment accelerates the overall growth rate while providing critical support for the Institute to meet its goals and objectives.
With continued news of endowment declines, it is important to understand the role of the endowment at the Institute, and the strategy Rensselaer utilizes now, and into the future, to preserve and grow the endowment for this generation and many more to come. In order to shed light on the role of this important long-term investment, Chief Investment Officer Walé Adeosun directly answers the questions that have been raised.
Adeosun is the first chief investment officer of the Institute, joining Rensselaer in 2004 from the John D. and Catherine T. MacArthur Foundation. In this role, he is responsible for the management of the Institute’s assets and liabilities including managing the endowment and pension plan investments as well as other financial capital assets, while working closely with the President, Investment Committee of the Board of Trustees, and the Vice President for Finance and Chief Financial Officer.
What is the purpose of the Rensselaer endowment?
The endowment supports the long-term financial health of the Institute, while contributing to current revenues. This includes student scholarships, chairs, professorships, research constellations, fellowships, departmental funds, as well as a percentage of the general operations budget.
The endowment is invested to ensure Rensselaer has intergenerational equity, meaning that it is invested and spent in such a way that no one generation is benefited to the expense of the other. And so that means that, in managing the endowment, we always balance a long-term perspective with the current needs.
How much of the endowment is spent on daily operations of the Institute?
Approximately 10 percent of the operating expenses are supported by the endowment. This is a much lower figure than one would find at many of our peer institutions, which are more heavily reliant on endowment than Rensselaer is. The remaining operating expenses are funded primarily by tuition and fees, gifts, sponsored research and grants, and other revenue sources.
What is the endowment investment strategy at Rensselaer?
In managing the endowment, three key areas are critical: the governance of the endowment, the philosophy that is used, and how it is implemented. In terms of governance, that structure changed when I came on board as the first Chief Investment Officer from the MacArthur Foundation in 2004. At that time the Rensselaer endowment began to be managed professionally, instead of by committee, and as a result the decision-making process has been streamlined to enable Rensselaer to quickly respond to opportunities or declines in global capital markets. The overall complexity of the endowment portfolio has grown substantially and we have seen the results in our excellent performance. In fact, our endowment was nominated by Institutional Investor’s Magazine as one of the three savviest endowments in 2007.
In terms of philosophy, we adhere to what is called a capital preservation philosophy. That philosophy is meant to preserve the endowment in perpetuity. To accomplish this, we emphasize strategies that will protect the endowment on the downside. And finally, in implementing our philosophy, we work to have an endowment that is globally diversified and diversified across strategies.
How has this strategy helped the endowment?
Having a well-diversified portfolio that focuses on downside protection enabled us to generate the excellent returns that we have posted over the last five years. In the last five years ending June 30, 2008, the endowment grew on average 14 percent per year versus a market benchmark such as the S&P 500, which grew 7.5 percent per year during that same period.
With this strategy we have been able to access the best performing managers, and stay away from the managers with strategies that were using leverage significantly. Part of what happened with this credit crisis is a massive deleveraging. So staying away from managers that were more involved with financial engineering instead of adding actual value to our investments has helped us tremendously. And that has to do with our capital preservation philosophy. There were times several years ago when those highly leveraged managers were doing extremely well, and their strategies were extremely attractive. But, we understood what those managers were doing, and we did not see the long-term value in those strategies.
How much has the endowment declined?
The endowment rose through the end of June 2008. At that time, the endowment was up 0.7 percent compared to a decline of 13 percent in the market benchmark of S&P 500. Since June 30, the endowment has declined 20.7 percent through December 31, 2008. However, even with this decline, the endowment has increased 6 percent each year over the past five years.
What caused the endowment to decline?
The decline is directly attributable to poor market conditions globally. But, we were able to access some managers who held the decline to a much lower percentage than the overall market. The market has declined 37 to 45 percent, likely higher if you look at what has happened outside the U.S. — in emerging markets and non-U.S. developed markets. Relative to the capital market s benchmark we were down about half of that rate.
How does the performance of our investments during this time compare to peer institutions?
According to information released by several peer institutions, the Rensselaer endowment has fallen less than a number of other institutions. When final results are tabulated, we expect that the Rensselaer endowment results at the end of December 2008 will be in the top quartile of peer institutions.
What impact will the decline in the endowment have on Rensselaer?
As a revenue source for the Institute’s budget, the decline in endowment will negatively impact the Rensselaer operating budget over the next several years. Being prudent managers of the Institute’s financial assets, we are taking actions now to maintain the endowment’s contribution level in the future.
Given the great shift in the economy, how has the endowment investment strategy changed?
There will be no massive change in the way we run the endowment. In light of what has happened, we are working to protect the endowment as much as possible going forward. In consultation with President Jackson, Vice President of Finance and Chief Financial Officer Virginia Gregg and the Investment Committee of the Board of Trustees, we continue to review the goals of the endowment and our asset allocation to determine if any major changes are warranted. We have seized the opportunities of market rallies to raise our cash allocation and reduce the portfolio’s overall risk. But, we will still remain judicious, paying attention to the market very closely. And we will continue to avoid any sort of a panic response to the economic and financial crisis but expose ourselves to extensive economic information and resources. In more general terms, the world is changing and the government is becoming the largest owners of many of the major corporations in the world, including financial institutions. Government actually has become paramount and the potential for policy to impact investment is much greater. As a result, we will be paying closer attention to Washington than ever before.
Did the previous performance of the endowment insulate Rensselaer during the crisis?
The growth in the endowment definitely enabled us to continue implementing The Rensselaer Plan in a timely fashion, and to maintain the financial health of the Institute overall.
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