Having managed two major endowment funds in Singapore, Madeleine Lee knows that the devil hides in the details, and Lee has learnt a few constructive lessons.
She managed the Singapore Symphony Orchestra endowment as a fund manager at Morgan Grenfell Investment Management (now Deutsche Bank) in the 1990s.
In 2005, she helped to establish the National University of Singapore (NUS) investment office to manage the institution’s endowment funds. She served as the deputy chief investment officer until the end of 2007. Lee is director of her own investment boutique, Athenaeum Limited.
The NUS endowment is the largest of Singapore’s three university endowments. It had more than S$1.4 billion in endowments at the end of March 2008, a slight increase from S$1.3 billion the previous year, according to the latest annual report. A portion of the endowment’s investment returns are meant to cover operational expenditure, which was S$1.2 billion as at March 2008. The university’s investment income was S$4.8 million, although it is unclear if it included income from outside the endowment.
In 2002, while on the Eisenhower Fellowship programme in the US, Lee studied the funding and investment models of large US university endowments such as Harvard, Yale and Princeton as well as major foundations like the Rockefeller Trust. Lee was convinced that “non-profits can achieve sustainable funding from investment income via judicious investing.”
The NUS endowment fund is invested primarily based on the Yale model, which advocates an optimised long-term, multi-asset, multi-currency, diversified, global portfolio.
The NUS endowment portfolio was structured to balance hyperinflation on the one hand with exposure to commodities and deflation on the other hand using bonds. In between were assets of “medium risk” such as mainstream public equities, hedge funds and venture capital assets. “It’s designed to be like a ship that can steer through different weather conditions,” Lee says.
The portfolio was structured to deliver sufficient returns to cover a percentage of NUS’ expenditure every year. In the US, 5% to 10% of public colleges’ operating budgets are covered by endowments while private institutions such as Harvard and Yale derive about a third of operational expenditure from endowments. Investment specialists say in Asia, it is more likely to be in the lower range of 5% to 10%.
In the halcyon days, meeting these budgets was relatively facile. The Yale endowment gained 28% in the 2007 fiscal year, 22.9% in 2006 and 22.3% in 2005, according to the Yale endowment update 2008. But in the 2008 fiscal year, the endowment only grew 4.5%.
Through the years, Yale’s asset allocation has been weighted in favour of public and private equities (10.1% domestic, 15.2% foreign, 20.2% private equity as of end June 2008), with significant weightage to real assets (29.3%) and absolute return (25.1%).
When Lee left the NUS endowment in late 2007, global equities formed about 40% of the NUS portfolio, which is within the range of 30% to 50% weightage among most US university endowment funds.
If the NUS endowment had not changed allocations significantly, it would presumably have taken a 25% to 30% dent in the past year. The Yale endowment is projecting declines of about 25% for the fiscal year ended June 30, while the Harvard endowment expects a 30% fall.
Indeed, since AIG and Lehman Brothers crumbled in October 2008, global equity markets had nearly halved in value before surging briefly, and some say unsustainably. Values of less liquid assets such as private equity and real estate have similarly tottered.
However, “in the long term, average annual returns of 4% to 6% is achievable without taking excessive risk,” Lee says.
“To reduce risk is key in long-term investing. If you stick to the balancing allocation, you will do well,” Lee explains. “While the long-term allocation is strategic, it pays to have a reasonable leeway in each asset class for shorter-term tactical moves, such as shifting five to 10 percentage points out of global equities into bonds and cash.”
In fact, she thinks that the NUS endowment could have reviewed the asset allocation more often, quarterly being ideal. “Not necessarily to change allocations for the sake of changing, but to gauge how the present allocation is faring under current circumstances,” Lee says.
Another thing she would have done differently is to appoint fewer investment managers and only for slices of the asset allocation in which very specialized knowledge was required. “To reduce mistakes, I would have picked more managers with expertise in very specific areas, such as biotech venture capital, private equity and real estate. These I would have given to the best two people in the league tables for each sector or geographical spread. Public equities and bonds can be invested into index funds, which are cheap and can be done in-house. If you don’t want to take huge risks, invest the bulk of the funds into an index and put a small portion into riskier products such as hedge funds to generate a little alpha,” she reflects.
She also advocates a clear line of responsibility within the endowment to enable expedient decision-making on a regular basis.
Investment decisions, quarterly fund manager review, “big picture” assessments of how the endowment is responding to the investment environment and other operational details must be vested with the management and not the board, she suggests.
“In Harvard, Princeton and Yale, the chief investment officer makes that call and is responsible for the results. The trustees or investment committee or board members should guide and steer at the strategic level, but they should not be making daily decisions. The board should make recommendations and reviews on an annual basis and let the management do their part the rest of the time, within the delegated authority,” she says.
Hence, it is expedient to have trustees and board members who understand the philosophy and objectives of an endowment fund. Lee says: “Their role is in oversight and governance, and it should not be confused with day-to-day decisions. David Swensen, chief investment officer of Yale University endowment, gives examples of different chairmen — some are consensus-building while some are strident and will shout you down. A clear and objective board is critical in the setup and running of an endowment fund.”