Chicago Endowment Losses Prompt Risk Evaluation (Update2)

By Tina Seeley and Gillian Wee

April 14 (Bloomberg) -- The University of Chicago, the school where President Barack Obama taught constitutional law, may alter its investment strategy after its endowment fell at least 25 percent, President Robert J. Zimmer said.

“There’s a lot of thought being given at the investment committee and the board of trustees right now to what does this tell us and how do we think about our risk and return,” Zimmer said yesterday in an interview in Chicago. “And not just how do we mitigate risk, but how much risk should we be absorbing?”

The fund, valued at $6.63 billion as of June 30, “is probably down somewhere right now in the 25 to 30 percent range,” he said. Zimmer, who’s looking for a new chief investment officer, didn’t specify how the school’s holdings may change.

Universities are reassessing their investments after endowments dropped an average of 24 percent in the second half of 2008, according to Commonfund Institute in Wilton, Connecticut. Princeton University, facing a projected drop of 30 percent this fiscal year, may reduce its private-equity investments, Shirley Tilghman, president of the New Jersey school, said this month.

The endowment at Northwestern University, in Evanston, Illinois, fell 24 percent in the 10 months ended in February. Harvard University, in Cambridge, Massachusetts, said in December that its $28.8 billion fund may fall 30 percent in the year ending June 30. Yale University, in New Haven, Connecticut, said the same month it may lose 25 percent. Harvard’s endowment is the largest among U.S. schools, followed by Yale’s.

‘Inadequate Attention’

“There was inadequate attention, I think this was common, to the costs of illiquidity,” Zimmer said. “That’s something a lot of universities are thinking about.”

Some schools have yet to disclose the value of alternative investments such as buyout funds and real estate, which take longer to price because they aren’t traded on exchanges. Investment losses since September have forced institutions including Harvard and Yale to freeze salaries, delay construction projects or borrow money to meet their budgets.

Alternative asset categories -- absolute return, real assets and private equity strategies -- made up about 63 percent of the school’s portfolio as of June 30, according to the school’s Web site. At that point, endowments managing more than $1 billion had an average of 52 percent of their assets in alternative categories, according to a Commonfund study from January.

Stepping Down

The University of Chicago endowment’s current investment chief, Peter Stein, plans to step down at the end of June for family reasons. His departure wasn’t because of the mix of assets in the portfolio, said Steven Kloehn, a school spokesman. His replacement will have a “significant impact” on how the endowment’s investment strategy changes, Zimmer said.

Zimmer, 61, has been the school’s president since July 2006. Zimmer, a mathematician, taught at Chicago for more than 20 years before leaving for Brown University, of Providence, Rhode Island, in 2002. He chairs the board of governors of Argonne National Laboratory, the school’s national laboratory and an offshoot of the World War II Manhattan Project where university scientists created the world’s first controlled nuclear chain reaction in 1942.

The University of Chicago’s fund almost doubled in value from 2003 to 2007, according to its Web site. The school had the 11th-largest fund among North American universities as of June 30, according to the National Association of College and University Business Officers in Washington.

Financial Aid ‘Untouched’

Earnings from the endowment make up about 8.6 percent of the school’s budget, the fund’s Web site shows. Endowment income is a primary source of revenue for colleges and universities, along with tuition, public financing and gifts. The value of the funds varies depending on investment returns, donations and spending. Schools use investment earnings to help pay for salaries, scholarships and capital improvements such as new buildings.

The University of Chicago, which said in March it will cut spending by $45 million and halt $30 million in building projects, won’t scale back on financial aid, Zimmer said.

“That’s absolutely, completely untouched,” Zimmer said of the financial-aid program. “In fact, simply because wealth is going down, we anticipate spending more on financial aid because on average people will need more money.”

The number of applicants seeking to enroll at the university has risen 40 percent in the past three years, partly because of the school’s Obama connection, Zimmer said.

To contact the reporters on this story: Tina Seeley in Chicago at tseeley@bloomberg.net ; Gillian Wee in New York at gwee3@bloomberg.net .

Last Updated: April 14, 2009 18:19 EDT

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