Risky Business

January 29, 2010

NEW YORK – Jonathan Hook remembers March 9 all too well. Ohio State University's chief investment officer received a handwritten note -- scanned into PDF format and e-mailed -- with six simple words: “Get Out Of All Equities Now.” The message, conveyed from the chair of Ohio State's investment committee, reflected the paralyzing fear that has gripped higher education in the past year.

“I was pretty confident [when I received the e-mail] we had hit the bottom of the market,” Hook said.

Hook declined to take the trustees’ advice, but the panic of those dark days continues to inform an evolving philosophy among colleges that are increasingly preoccupied with assessing the risks of their investments. That increased attention to risk was reflected throughout Thursday’s National Association of College and University Business Officers Endowment Management Forum, where panelists were far more apt to discuss their efforts to spot the potential pitfalls of particular investments than to boast about the promise of exotic new financial instruments.

For Hook, who was appointed at Ohio State just as the economy started to tank, staffing his office with a manager solely charged with assessing risk was among the first orders of business. Harvard University also added a chief risk officer recently, and a number of managers attending the conference said their institutions have done the same.

The addition of more employees charged with contemplating the risks of an overall portfolio reflects a greater desire -- and need -- to translate the complexities of potentially volatile investments in plain English to trustees who set policy and don’t necessarily have investment backgrounds, one manager told Inside Higher Ed. It’s also a bit of “butt covering,” he added.

“Look, I have a risk officer,” a president can tell the board.

Lessons in Liquidity

There’s one risk that managers acknowledge they simply didn’t talk about enough before the downturn, and that’s “liquidity.” Loosely translated into “cash on hand,” liquidity was hard to come by for institutions that invested heavily in vehicles like start-up companies and other assets that are difficult to pull out of in a hurry. When endowments faltered, particularly for the wealthiest institutions, colleges had to assess whether to sell off their illiquid assets at discount rates or borrow money to keep their institutions running. Most chose to borrow instead, according to a NACUBO/Commonfund survey released Thursday.

While borrowing may have been the right move in the long run, there’s little question that colleges learned the hard way that too many illiquid assets can create a real problem. The dangers of illiquidity, which one conference attendee noted “has been mentioned 200 times today,” appear to be the lasting impression of the economic crisis for endowment managers.

As with any lesson, the gravity is greater when Harvard University says it's learning it, too. Jane Mendillo, president and chief executive officer of Harvard Management Company, acknowledged Thursday that before the crisis, endowment managers at the university seldom considered that Harvard would need greater access to cash from the endowment just to meet short-term needs. Harvard was bringing in such celebrated returns with its illiquid investments that the university didn’t consider the consequences of that dynamic changing, Mendillo suggested.

“For many years illiquidity has been our friend,” she said. “At times we felt we could not keep up with the flow of money being recycled back. Remember that?”

Between 2008 and 2009, Harvard’s endowment fell 29.8 percent or $10.9 billion, NACUBO and Commonfund reported Thursday. That’s the largest loss of any of the 863 colleges surveyed this year, and more than every other Massachusetts college combined. It’s also more than the Gross Domestic Product of the Bahamas. But, going into the year with $36.6 billion, Harvard had the most to lose -- and did just that.

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