Dollars and Sense

Rensselaer’s endowment, of course, is not literally money in the bank. Since only a portion of the funds in the endowment are spent annually, one of the most important concerns is how the rest of the money is invested. A significant change at Rensselaer occurred in this area three years ago when, with President Jackson’s leadership, Rensselaer created the position of Chief Investment Officer to maximize returns on the endowment.

Previously, managing assets had been the sole responsibility of the investment committee of the board of trustees. Now the Chief Investment Officer and his staff initiate many of the strategies, with the board’s oversight — a modernized setup geared to a fluid, complicated investing environment.

“Dr. Jackson’s focus on investing and knowledge about it are rather unusual for a president,” says Gregg. The university hired Walé Adeosun, formerly a managing director at the MacArthur Foundation in Chicago, as its first Chief Investment Officer, and in turn, Adeosun has set about changing the way Rensselaer invests its money.

“We adopted a capital preservation philosophy,” says Adeosun. “If you lose money, it’s harder to get it back. But we’ll try to capitalize on the upside. We’ve aimed to have a more diversified portfolio, across more asset classes.”

In practical terms, this means the Institute has reduced the percentage of its holdings in U.S. stocks. Whereas about two-fifths of Rensselaer’s endowment once consisted of domestically-traded stocks, that figure is now around 20 percent, the desired target. The university aims to have a similar percentage of the endowment in non-U.S. stocks and in what it calls “marketable alternatives,” meaning a range of investment strategies that can include hedge funds. Rensselaer is looking to invest 15 percent of the endowment in each of two other types of holdings — fixed-income funds and equity in private companies — while trying to increase its holdings in “real assets,” including real estate, from three percent to 10 percent.

That approach is meant to insulate Rensselaer from sudden losses. In February, when the Dow Jones Industrial Average of stocks took its worst plunge in more than five years, Rensselaer’s now-diversified holdings allowed the endowment to shrug off the event. “It was something we’ve been expecting,” says Adeosun. “There had been too much liquidity in the market, from speculators flowing in with their funds. A correction like this gets rid of the froth. Those of us who believe certain markets have good fundamentals can stay in there, and let other people leave.”

Adopting a seemingly conservative approach would also seem a natural consequence of increasing the endowment. Rensselaer’s endowment, after all, has gone up over $200 million in five years. With more money to invest, any reasonable rate of return will produce more revenue in absolute terms, making risk reduction all the more appealing.

But the realities of large-scale investing are not that simple. Large university endowments typically get higher rates of return than small ones — because large funds can spread their bets around broadly and take targeted risks, some of which pay off handsomely, leading to larger overall gains. In the 2006 fiscal year, endowments worth at least $1 billion had an average annual return of 15.2 percent. But endowments worth $25 million or less had an average return of 7.8 percent, according to a study by the National Association of College and University Business Officers, and financial-services firm TIAA-CREF.

For this reason, Rensselaer’s investing goes beyond a basic division between “safe” and “risky” assets. “The capital preservation philosophy does not necessarily mean we will only pursue less risky strategies,” explains Adeosun. “It’s in the aggregate that we hope the portfolio is less risky.” Any market can decline, so the key is maintaining counter-balancing investments which react to different economic stimuli. “So-called ‘risky’ strategies can dampen the risk of a portfolio overall, because they do not move for the same reasons,” says Adeosun. “If people ask if we will have hedge funds in the portfolio, the answer will be yes. Do they bring down the overall risk of the portfolio? The answer also is yes.”

A further complexity in endowment investing is that the distribution of funds must be frequently measured and recalibrated — not only as a basic practice, but because of the 5 percent released every year for university spending. However, Rensselaer’s investments have more than enough room at any given moment to allow for the shifting of funds in this manner. “More than 50 percent of the endowment is usually liquid or nearly liquid,” Gregg says. The investment office also produces an annual investing forecast, and can reassess its distribution of assets throughout the year.

So far, the new approach seems to be working. Rensselaer produced a return on its endowment of 12.8 percent for the fiscal year ending June 30, 2006, and has maintained an average return of 15.7 percent over the last three years — very much in line with university endowments in the billion-dollar weight class. Consistent returns at that level mean Rensselaer could continue using 5 percent of the endowment for annual operations while seeing self-sustaining growth in the endowment, a situation more commonly associated with larger universities.

But for donors like Totta, the endowment is about more than return on investment — it’s about making possible an exceptional higher ed experience for promising students.

“We really have to encourage young people to get into science and engineering or we’re going to lose all the potential ingenuity we have in this country. And Rensselaer has the capability to teach people to be innovative and creative.”