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Endowments at the University of Rochester and Rochester Institute of Technology performed well below market indexes last year, and a local finance expert maintains that misguided investment strategies are costing these institutions millions of dollars each year.
The total return on UR's endowment portfolio of $686.2 million was 14.3 percent for fiscal year 1995 ended June 30. RIT's endowment investments of $244.5 million showed an annual compound return of 16 percent for the year.
Both UR and RIT pursue an active management strategy, using external managers who try to beat the market. Last year, this approach cost the institutions several million dollars in lost endowment value, said Gregg Jarrell, finance professor at UR's William E. Simon Graduate School of Business Administration.
"It's just shockingly poor performance," he said.
Had UR indexed to the market--a passive strategy--its endowment portfolio would have seen a return of 18.25 percent for the year, or an additional $24 million.
For RIT, which invests more heavily in stocks, a passive benchmark return of 21.5 percent would have added $11.5 million to its endowment coffers.
Using this strategy also would save transaction costs and fees now paid to the external managers, Jarrell said. Thirteen external advisers manage RIT's portfolio; UR uses 20 external managers.
RIT has considered indexing, but "given the proper mix of managers, we think we can beat (the market)," said William Dempsey, vice president of finance and administration.
Dempsey said RIT beats the market most years. This year, the portfolio "could have done better," he added. "Hindsight is always 20/20."
Using a range of external managers--each with different investment strategies and styles--protects the portfolio, Dempsey maintained.
Jarrell disagrees.
"Real men don't index--that's the attitude," he said.
Indexed funds account for more than 5 percent of UR's endowment portfolio, and that percentage is expected to grow, said Richard Greene, executive vice president and treasurer.
However, the issue of whether the portfolio should...