Last week, the Williams College Investment Office issued its first-ever investment report, summarizing recent changes in endowment management strategy and the extent of the losses brought on by the recent financial turmoil.
The report, co-signed by Chief Investment Officer Collette Chilton and Trustee and Investment Committee Chair Michael Eisenson ’77, represents an effort to increase the institution’s financial transparency. The report also provides a general overview of the relationships between the Investment Office, the Investment Committee, the Advisory Committee and the financial managers handling the College’s money directly.
Formerly, the College would couple broad updates on its investments with the “Climb High, Climb Far” annual report; however, given that the fundraising campaign ended in December, the College has settled on this new format, which it plans to release annually. Jim Kolesar, director of public affairs, explained that the College’s decision to report its investments in greater detail was made “in light of understandable interest in investment operations among current and potential donors,” he said.
The report details the annual returns on the College’s endowment for the past 10 years, which reveal a high level of variability, with returns ranging from a 50.9 percent increase in 2000 to the recent drop of 18.4 percent in 2009, in total amounting to an annualized return rate of 7 percent.
Chilton and Eisenson also outline the specific strategy that the College’s endowment management is now adopting. Throughout the past few years, the Investment Office and Committee have been moving away from a long-standing U.S.-only equity strategy and toward attempting to increase diversity across asset classes and toward a more market-neutral and globally invested portfolio.
“We believe that the single largest driver of long-term performance is the decision of how we allocate assets, rather than how we time particular investments,” the report reads.
Whereas the 2008 policy portfolio allocated 50 percent of the endowment to equity asset classes, the portfolio for 2009 allocated 48 percent, and the portfolio for 2010 will allocate only 42 percent. These changes are all motivated by an underlying appreciation for the need to increase the diversity of the endowment’s portfolio in order to hedge unnecessary risk.
“While traditional equities provide the potential for long-term portfolio growth, we are continuing to de-emphasize traditional equities in favor of asset classes that may provide more attractive risk/return characteristics and protect the portfolio when equities struggle,” the report reads.
To facilitate this transition in part, the Investment Committee has approved a new 5 percent allocation to non-investment grade fixed income, as well as a 3 percent increased investment in real assets, bringing the latter total to 9 percent of the endowment. According to the report, the College still maintains a much lower investment in real assets compared to its peers, but the Investment Committee approved the increase because of the buffer against inflation that real assets provide.
The report also outlines the relationship between the endowment and College operations in a section titled “How the Endowment Supports the Williams Budget.” In 2009, the College’s operating budget necessitated in the range of $100,000 of spending per student, an amount well in excess of full tuition and fees. “Williams makes up the vast majority of the difference through earnings on endowment, which supported nearly 40 percent of the operations budget this past year,” the report reads. In a bow to potential alumni donors, the report also mentions that gifts make up 1 to 2 percent of the endowment’s annual growth.
The producers of the report also emphasized the College’s philosophy of maintaining liquidity within the portfolio. “Maintaining a fully invested, yet liquid portfolio is integral to the dual goals of generating the long-term expected return necessary to support the College and providing funds to the College on a timely basis,” it reads.
“Oftentimes, high returning investments may come at the expense of liquidity,” it reads. The report noted that at the moment, the College can convert more than one third of its holdings to cash within a month without penalty.
In terms of the organizational structure that oversees the endowment, the Investment Office reports to the Investment Committee to determine appropriate asset allocation for the endowment, as well as general strategy and investment policy. During this process, the Advisory Committee is referenced for its expertise regarding specific asset classes and to review and recommend specific managers for each asset class that the Investment Office should consider. Currently, five out of the seven members of the Investment Committee also currently serve on the Advisory Committee. The last meeting to approve investment strategy was held on May 26, 2009, in which the 2010 policy portfolio was approved.
After the asset allocation is set, the Investment Office, led by Chilton, reviews all of the managers against a number of ideals such as transparency and liquidity, as well as overall competence and ability. This involves meeting with each manager either every month, for time-sensitive investments such as equities, or a few times a year for classes like real estate that are illiquid and tend to trend more slowly.
The Investment Office works toward maintaining the overall strategy and pre-set asset allocations and keeping Williams’ endowment in the hands of what it deems to be best managers possible. However, the report fails to identify any of the managers of the endowment, citing ideals of confidentiality and equality. “Because some of our most successful managers insist on confidentiality, and because the College prefers to treat managers equally, all remain confidential,” it reads.
Chilton could not be reached for comment in time for press.
Additional reporting by Jared Quinton, managing editor.