This is the second part of a two-part article on the University’s financial situation. The first appeared in Tuesday, Nov. 14’s issue.
As the University works to improve its financial standing, many administrators are looking to the past for lessons they can apply to the future.
One major source of the University’s relative financial weakness stretches back to a large windfall it reaped from Xerox stock in the late 1960s. The endowment surging, the University started to spend heavily and failed to develop innovative investment strategies, according to finance officials and Professor of Economics Gil Skillman.
“After experiencing the extreme market volatility of the 1970s, Wesleyan reacted by becoming overly conservative in its investment strategy, over-investing in bonds relative to the Board of Trustees’ own guidelines,” Skillman said. “As a result, in hindsight, we didn’t take full advantage of the overall run-up in stocks from the mid-1980s to the mid-1990s.”
As a result of its gains, the University also neglected the creation of an elaborate fundraising office, compounding its investment mismanagement. It has tried to rectify this mistake in recent years, launching an over-$200 million capital campaign under President Douglas Bennet.
“At one point, I believe in the mid- to late-1980s, Wesleyan’s and Williams’s endowments were virtually the same,” Skillman said. “The fact that they now enjoy more than twice our endowment is primarily due to the fact that they started serious fundraising efforts sooner than we did.”
Vice President and Chief Investment Officer Thomas Kannam agrees that fundraising is an area that has historically lacked attention.
“We don’t have the same infrastructure and machinery that others do,” Kannam said, adding that the next capital campaign will be even larger than the last one.
Associate Vice President for Finance Nate Peters listed the three pillars of good administration—alumni giving, efficient endowment management, and spending guidelines—and said all three were necessary for the University to remain a top school.
“It’s not unlike a three-legged stool,” he said. “You have to make sure the stool has all three legs at the same time, or it will fall down.”
Since 2000, Kannam has worked to address the investment side of this equation, reversing the University’s earlier and more conservative financial strategy and instead pouring money into hedge funds and private equity.
“Going into private equity has helped us a lot,” said Vice President for Finance and Administration John Meerts. “We’ve been performing in the top quartile of universities in our endowment index.”
Kannam’s aim has been to diversify the financial portfolio to reduce its overall vulnerability to the market as well as increase gains.
“By adding investments that have a low correlation with stocks and bonds, you can reduce volatility while increasing your return,” Kannam said. “Volatility has gone down significantly [with the diversification of the portfolio].”
Hedge funds are financial organizations that can provide additional security by generating profit even if the market is not performing well.
“The hedging strategy has more arrows in its quiver,” Kannam said. “[A hedge fund] can make negative as well as positive predictions that result in gains, [known as] shorting the stock. If a company is overvalued according to its statistical analysis, it can make that prediction and if it is, it can make a gain.”
Private equity—the partnering of an investor with a privately-held firm—can yield significant dividends, but only to those willing to wait some years. According to Kannam, many Ivy League universities hugely benefited from investing early on in Internet companies in the 1990s. He thinks the University can likewise benefit from entrepreneurs.
“We can afford to be patient, we have a longer perspective,” Kannam said. “That is, after all, the definition of an endowment. It has to be here forever.”
As private equity is by its nature a riskier proposition than other forms of investment, the University can only pour a certain amount of money into it.
“[The Ivies] can make $100 million bets. We can make $10 million ones,” Meerts said.
Kannam, however, notes the benefits of being a smaller private equity investor.
“Wesleyan can be a preferred partner for a smaller [private equity enterprise],” he said. “Putting too much capital in a company can create disincentives.”
Ultimately, Skillman says, it is fundraising, not endowment management, that will lift the University into financial security.
“Given we have a larger student body than most our liberal arts peers, we also have an increasingly larger alumni base from which to solicit donations,” Skillman said. “Eventually that difference should start to pay off.”
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