The next downturn

I was distressed to read the interviews with President Tilghman and Andrew Golden regarding the endowment fund (feature, Dec. 9). Going into the worst market decline in decades, the fund’s asset allocation was more than 70 percent in nontraditional assets, and many of these alternative investments had limited liquidity. Even worse, some were subject to capital calls. Since Princeton did not have a liquidity fund for cash needs, this created a significant strain on the University’s budget.

The article indicated Mr. Golden is reviewing how the University is investing its money and is considering a ­liquidity fund. I am hopeful one would be set up in the very near future and contain at least 5 percent of the ­portfolio.

The asset allocation for the current year is little changed from fiscal 2008; the article did not imply that a different allocation is likely in the near future. Mr. Golden has set a return goal of 10 percent annually going forward even if a liquidity fund is established. This is very aggressive and almost certainly would entail significant risk to achieve.

I have no argument with a widely diversified investment portfolio. I don’t believe the endowment falls into this category, due to the heavy reliance on nontraditional investments. I would be interested in how much risk the University took to earn 9.7 percent over the past 10 years (using the Sharpe ratio might be one such way).   Unfortunately, none of the risk measures I am familiar with can account for the liquidity and cash-call risks.

Princeton’s endowment is a unique asset. It has the contradictory mandates of providing long-term financial security while also meeting many short-term budget needs. I believe it takes careful risk controls and broad diversification to meet these goals and survive the next inevitable market downturn.