Midd assets take a new direction

Author: Liz Campbell

In June 2005, the Investment Committee of the Board of Trustees elected to partner with Investure, LLC, an asset-management company specializing in small colleges and nonprofit organizations, in order to more effectively manage Middlebury College's endowment and assets. The new partnership will function as the College's external investment office and is anticipated to substantially maximize Middlebury's endowment performance.

In response to the growing size of the College's endowment and to the increasing complexity of investment strategies employed by well-managed endowments, the Investment Committee underwent a comprehensive endowment management review process in late 2004 and in the first half of 2005. Concluding that an outside firm would provide more efficiency in finding profitable alternative investments and diversify its portfolio, the Committee chose to pursue a partnership with Investure.

Investure was started by Alice Handy, former chief investment officer of the University of Virginia's Investment Management Company, to serve small colleges and nonprofit organizations. Specifically, the company caters to a growing niche of entities such as Middlebury College, that have sufficient assets to take advantage of sophisticated investments like hedge funds, but lack the resources to do so without outside help.

Manager of Investments Derek Hammel is confident that the new partnership will generate significant financial gains for the College. He remarked, "We expect that this organizing structure will maximize endowment performance due to Investure's staff expertise, access to top-tier managers and specific experience and demonstrated success in selecting and investing with managers in alternative asset classes, such as real estate, private equity and hedge funds."

The goal of Investure is to function as a full-service, off-site endowment-management office. For smaller endowments of colleges like Middlebury, there are significant advantages to hiring a boutique firm like Investure. It is difficult to retain a chief investment officer in such a remote area of the country, so this specialized firm facilitates continuity and can pay more attention to its endowment. Moreover, as smaller institutions are beginning to seek alternative investments with the allure of bigger returns, it has become critical that their assets be overseen by somebody with appropriate expertise.

Before the partnership was established, the College relied on the Investment Committee to provide a foundation of resources that ensured the education of future students received as much support from the College's endowment as the education of current students. Like most other college and university endowments, Middlebury's Investment Committee partnered with several different external firms and asset managers, each specializing in a certain investment area, to invest the College's Associated Trust Fund (ATF) portfolio, a commingled pool of individual endowment funds. The College's endowment totaled approximately $765 million as of June 30, 2005, 91 percent of which was invested in the ATF.

The long-term success of the endowment has been very strong, having generated net annualized returns of 11.6, 12.6, 5.8 and 11 percent for the one-, three-, five- and 10-year periods that ended June 30, 2005. "It cannot be overly emphasized that the focus is on long-term investment performance," stressed Hammel. "The portfolio has been carefully constructed and appropriately diversified so that over the long term, the College has a very high likelihood of achieving its goals, knowing full well that we will have to weather down some years along the way, like we saw from 2000 to 2003."

Current annual distributions from the endowment fund approximate $45 million, enabling the College to provide an effective and valuable educational experience for students. Nonetheless, as the endowment continues to grow and college and university investment strategies have become more complex, the Investment Committee deemed it necessary to employ the expertise of Investure in order to benefit from more comprehensive investment opportunities and better informed financial decisions.

Handy herself has been especially successful in investing in hedge funds, an area to which the College will most likely pay more attention in the future. Hedge funds are loosely regulated private-investment partnerships. The strategic advantage employed by these funds lies in selling short, a technique in which fund managers borrow stocks and bet that they will decline in value. If the price of shares decreases in value, the managers replace the borrowed stocks at the lower price, thus gaining the difference.

Although there is a calculated risk in investing in hedge funds, some are considerably less volatile than others, and managers with proven expertise, like Handy, can earn higher returns with such funds when markets are down than with other investments.

Furthermore, in its partnership with Investure, the College will not cede any financial authority, but rather will gain the advice and knowledge of a more experienced and informed financial adviser. The Investment Committee still maintains full oversight and discretion on the endowment portfolio.

"Investure is a partner on whom we will rely to provide ideas for new investments, monitor existing manager relationships, make suggestions regarding asset allocation and perform certain reporting and accounting duties related to the portfolio," said Hammel. "Although the partnership with Investure is only just months old, things are off to a great start in terms of process, oversight and investment performance."