Today's financial markets are so dicey--evidence this year's crash of last year's high-flying technology stocks--that education professionals with financial investment responsibilities should reevaluate their strategies and make responsive changes, shouldn't they? Not so fast, say experts. Major or minor changes may not be needed if those professionals already have in place a sound, written investment policy and asset allocation plan that specifies in detail the institution's investment goals plus the levels of risk it is willing to assume to achieve those goals.
"The key is to develop a solid, well-thought-out investment strategy," says Tom Pair, Atlanta office investment director for CIBC Oppenheimer, a New York-based firm that researches and manages institutional investments. "You want a policy that can withstand even severe market changes such as those we've seen this past year. And if your strategy didn't work out, then it probably wasn't as well drafted and considered as it should have been."
So what makes for a sound investment policy? According to Pair, the first consideration is always what near-term, intermediate and long-term liabilities the foundation has for the funds it receives. Those liabilities will dictate the liquidity/maturity factor in the policy.
"Some of the information that gets you to this mindset includes who is governing this pool of money? A board of directors, a single person or several people? You need to isolate who has what responsibilities and whether they are managing themselves or delegating that function to a consultant," he says.
The policy should always specify investment goals in of expected ranges of return, and it should specify acceptable risk levels in terms of acceptable types of investments.
Metropolitan West Securities, which manages CSU's portfolio, has built three short-term investment pools with varying lengths of maturity. The shortest-term pool ($20 million to 35 million) allows daily investments and withdrawals, the midterm fund ($112 million to $130 million) is set up for monthly activity and the longest term ($112 million to $130 million) pot is designed for annual investments. "But there is no strict prohibition on time between the middle and long-term pools," he says. "We can move investments without penalty between those two."
Although the shortest-term fund allows daily activity, CSU is especially cautious about the timing of its transactions. "In a rapidly changing interest rate environment, if you go into the pool and later come out on the wrong day, your principal could be seriously exposed," he explains. "That happened a couple of years ago. There were several big market swings, and some folks invested in one month and came out the next, losing about $10,000 in principal for each $1 million invested. Losses like these don't happen often, but they have occurred." That is why it is so important for investment policies to be ultra-clear, thoroughly defined and highly specific.
San Jose State University Foundation took that direction when it recently tweaked its investment policy (see "San Jose State University Foundation Long-Term Asset Allocation Policy Targets and Ranges").
"As an example, we had a general allocation of 33 percent before, but didn't specifically prescribe the types of equity investments the funds should be in," says Suzanne Murphy, director of client financial services. "Our new policy spells everything out. We are invested in one commingled trust, four mutual funds and one fixed income bond investment. By specifying these allocations in our policy, we give the managers more flexibility to invest within their funds."
Laurence Gray, of the Atlanta-based investment consulting firm Gray & Co., notes, "We can show you statistically, based on historical information, what the predicted range of returns is for various combinations of securities. For example, the one-year swing, from positive to negative, for a 50 percent bond/50 percent stock portfolio compared with the same swing for an all-equity or an all-bond or an all-stock portfolio, or any combination thereof. And we can do the same over one year, five years, 10 years, whatever time frame you like."
As Gray points out, because of the market's gradual appreciation through the years--despite occasionally tanking as it did this spring--the longer the time horizon lower the variability of return on investment. "The risk of losing money in one year is much higher than over 10 years in any type of investment," he says.
Along with his colleagues, Gray maintains that when the foundation has researched and determined its needs in terms of liabilities and return--and when it has developed its asset allocation model with some degree of macro-economic forecasting--there is no need to react to market gyrations by returning to the policy and doing tactical asset allocation.
Sometimes trustees get blindsided by high returns when, if the returns were adjusted for risk, the manager with the higher gross performance might not be the best choice for the college. "The real question is, `What did you do to get those high returns?' Chances are the manager has been assuming a risk level that is unacceptable for my client," Gray says.
Bibliography for: "Keeping your endowment investments steady: if the recent market machinations have shredded your college's investments, it's time to re-examine your school's strategy - Statistical Data Included"
Judith Harkham Semas "Keeping your endowment investments steady: if the recent market machinations have shredded your college's investments, it's time to re-examine your school's strategy - Statistical Data Included". Matrix: The Magazine for Leaders in Education. FindArticles.com. 16 Jun, 2010. http://findarticles.com/p/articles/mi_m0HJE/is_4_2/ai_79961340/
COPYRIGHT 2001 Professional Media Group LLC
COPYRIGHT 2001 Gale Group
From Bnet published on Sept, 2001 by Judith Harkham Semas
