Endowment gains in ’07-’08, then takes a slide

The University’s endowment generated a 5.6 percent return on investments in the 2008 fiscal year, reaching $16.4 billion on June 30, the year’s close. But in market terms, June 30 is a long time ago. In the first 3 1/2 months of the current fiscal year, the endowment saw a double-digit drop in the wake of market turmoil in the United States and abroad, according to Andrew Golden, president of the Princeton University Investment Co., or Princo.

Golden, the endowment’s top executive since 1995, said that Princo’s portfolio was holding up relatively well, but he called the recent financial downturn “the toughest market environment that any active professional has ever seen.” Speaking on Oct. 14, a day when the S&P 500 Index closed near 1,000 points, 280 points below its June 30 level, he said the endowment’s losses since June had been about half the size of the market’s losses. “To put it in perspective, we have given up something significantly less than two years of returns, whereas stock markets have given up five to 10 years, depending on how you want to measure,” Golden said.

While the University’s budget and short-term plans are outside Princo’s purview, Golden said that Princo’s view of financial conditions for the next 10 years has not changed significantly. Golden has been speaking regularly with Princo board members, who have shared their knowledge of the financial markets. “In times like this, we’re gathering intelligence from every resource, and the board has been particularly helpful,” he said.

The endowment’s performance in 2008 capitalized on diversification and less traditional asset classes, including independent return managers (a subset of hedge funds), private equity, and real assets. The endowment’s relatively small fixed-income holdings also performed well, Golden said.

As of June 30, Princeton’s endowment had compounded at an annual rate of 14.9 percent over the last 10 years. The University’s 2008 return ranked third in the group of America’s five largest private university endowments, behind Harvard (8.6 percent) and Stanford (6.2 percent), and ahead of Yale (4.5 percent) and MIT (3.2 percent). All five schools posted returns of 20 percent or higher in 2007.

While endowment managers have the advantage of an extraordinarily long time horizon — Golden speaks of keeping Princeton strong for its next 250 years — they also must guard against the opportunity costs of being too defensive during uncertain times. “Up to this point, we haven’t felt the need to do anything radically different, and I suspect that we won’t,” Golden said. “But there’s a difference between focusing on the long term and being on autopilot. We’re not on autopilot.”