Fall 2006

Endowments That Work

Earlier this year, The New York Times reported that Wooster’s endowment “is on a roll.” Foundation and Endowment Money Management has nominated the College as one of the “small nonprofits of the year.”

As the final push to meet the endowment goal of the Independent Minds Campaign gets underway (see news story on p. 6), we spoke with Stewart Massey ’79, founder of Massey, Quick & Co. LLC and chair of the investment committee of the board of trustees since 1992, about Wooster’s investment approach and stellar results.

WOOSTER: Let’s start with the big picture.What are the key principles that guide our endowment investment strategy?

MASSEY: Our primary goal is to achieve consistent, positive absolute returns in both up and down markets, while minimizing risk and volatility.We want to surpass our benchmarks over a market cycle, which is typically three to five years.

Most investment managers put themselves in a race with an index like the S&P 500, but for an endowment, that’s meaningless. A manager can come in and say, “Gee, we had a great year, the S&P was down 22 percent and we were only down 10.” But that is not a victory. It’s a defeat for the manager and it’s a defeat for us, because in order to support our academic program, the endowment has to pay out five or six percent every year, whether the market is up or down.

That’s why we have two numerical goals. The first is our traditional blended benchmark, composed of 60 percent S&P 500, 20 percent Lehman Aggregate Bond Index, 15 percent EAFE*, and 5 percent 90-day treasury bills. But more realistically, our benchmark is the annual endowment payout percentage, plus the rate of inflation, plus a premium to ensure that the endowment continues to grow. Right now, that would put our goal somewhere in the high single digits.

WOOSTER: How has the endowment performed against those benchmarks?

MASSEY: For the fiscal year that ended on June 30, 2006, the endowment returned 11.10 percent net of fees and expenses. This compares to a return of 8.65 percent for our blended benchmark and 8.63 percent for the S&P 500. Since July 1999, it has returned 43.50 percent, versus 20.34 percent for the blended benchmark, and 7.31 percent for the S&P 500.What’s equally important is that those returns were achieved with a third less risk than our blended benchmark and half the risk of the S&P.

Most investors think of returns in one dimension: Up or down. But you also need to look at how much risk was involved in getting those returns. How many units of risk are we taking for every unit of return that is delivered? That has become our mantra.

WOOSTER: The Times noted that one key to our success has been the use of alternative investments, such as private equity, real estate, and hedge funds.What are some of the advantages of including these investments in Wooster’s portfolio?

MASSEY: It comes back to our goal of achieving consistent, positive absolute returns, no matter which direction the market’s moving. A traditional mutual fund, for example, can only make money when the market is going up, but a long-short equity fund has more flexibility to take advantage of up and down markets. We’re not involved in the sort of exotic, highly-leveraged strategies that people think of when they hear the word “alternative.” But if you’re going to construct a portfolio to mitigate risk, long-short equity, real estate, private equity, and venture capital should be part of the mix.

WOOSTER: The College has a very experienced, very handson investment committee.Talk a little about the makeup of the committee and how it does its work.

MASSEY: The committee includes a former partner from Goldman Sachs, the president of a mutual fund company, the vice chairman of a major savings bank, and the former chairman of one of the country’s largest reinsurance companies.We meet formally six times a year: three times in Wooster, in conjunction with board of trustees’ meetings, and three times in New York. The Wooster meetings run two hours and focus on asset allocation and manager reviews. The New York gatherings last a full day and are comprised of meetings with six or seven money managers and a discussion of our asset allocation policy and administrative items.

The first thing we look at in any meeting is asset allocation— are we in the right places? The second thing, once we’ve decided how to allocate among asset classes, is do we have the best and brightest managers who can execute inside those asset allocation buckets? I think the key to our success is that we’ve been able to pinpoint outstanding investment talent.

*EAFE: Morgan Stanley Capital International’s Europe, Australia and Far East Index

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