It seems that almost any posting for a Head of School search for July 2010 highlights endowment growth as a key aspect of the new Head's job. Granted, the Great Recession has made all of us think about our endowments (generally speaking) and the degree to which we rely on them to make budget (specifically).
From my perspective, to say quite simply that we need to focus on endowment growth is to suggest that we merely need raise dollars for the endowment. To be sure, that's accurate - we do need to raise dollars. However, the more challenging aspect of endowment growth, going forward, has to do with the strategy behind the composition of the endowment. In other words, does your school have a strategic endowment?
Endowment management was a growing phenomenon through mid-2008; returns were stratospheric for some, outstanding for others, and quite good for the remainder. It seemed as if all schools were moving to Common Fund or other "boutique" endowment management firms, and that none of them would lose.
Then reality hit. I won't go into the painful details; they are known to us all.
What I've been contemplating lately is, as we struggle through the aftermath of 2008, whether we should approach our schools' investments by thinking of them as a strategic endowment.
By strategic endowment, I mean a group of funds that is invested differently from pre-2008 models. Here is one question as an example: should our funds be majority-invested in American stocks, i.e. stocks that are traded on the American exchanges? In other words, how do we anticipate/plan for the effects of inflation on our endowment portfolios? Should we be invested not solely in "international stock funds" that are run by American financial firms, but invested directly in stock funds in other countries, by means of another currency?
Another way to pose the question might be: should our endowment holdings be in US dollars only? Should we hold several currencies so as to mitigate the risk of inflation inherent in one currency alone? Should we treat currencies as a valuable segment of our portfolios, just as we would address "diversification" as being important in an overall portfolio?
What would such a portfolio look like, and what would be the cost basis to have it managed? Could an American financial firm manage it, or should we look to small endowment management groups to manage such a portfolio? What level of service are we looking for now? Is a passive endowment portfolio appropriate for us, or should we seek out an active portfolio manager? Again, what are the cost implications of such a move?
Given the importance that all schools are attaching to endowment, it seems only logical that, first of all, we ought to determine how to mitigate the downside risks in our extant endowment portfolios before focusing on how to enhance their value. I submit here that the "investment model" approaches that firms have used in the past should be questioned rather vigorously before a board's investment committee gives the go-ahead for a strategy.