DURHAM, N.C. -- Eugene J. McDonald is walking away a winner.
His June retirement as president of Duke Management Co. and chief investment officer of Duke University will follow yet another year of eye-popping returns.
That's 47.54% in 1999, and an average annualized 25.16% for the three years ended Dec. 31, 24.97% for the five years and 16.9% for the 10 years.
In the decade that Mr. McDonald has presided over Duke Management, it has grown from less than $1 billion to more than $3.6 billion.
Back in 1990, when Duke University set up the management company, it oversaw about $560 million in endowment fund assets and not quite $150 million in pension fund assets. They're now $2.8 billion and $535 million, respectively (Duke Management also runs some money for the university).
The management company has bested its long-term bogey -- 70% Standard & Poor's 500 index30% Lehman Brothers Aggregate bond index -- consistently, and has done well compared with other large university endowments.
With a 23.1% return for the fiscal year ended June 30, Duke Management ranked at the top of 25 of the largest university endowments; and second out of a peer group of the 50 largest university endowments.
The performance, he said, "has been a great source of satisfaction."
Mr. McDonald became the first head of the new management company just as the U.S. economy was headed into its longest expansion ever, and as the stock markets were poised for takeoff. "We have been blessed with great markets," he said, adding that Duke Management's investment strategy allowed it to take advantage of those markets.
Key to that strategy was making a big bet on private equity, particularly early venture capital funds, at a time when those funds were producing anemic returns and having a hard time raising capital. Thanks in large part to stratospheric returns from dot-com companies going public in recent years, that asset class now represents close to 30% of the management company's total assets, about double its target 15%.
In more than one year recently, the management company has earned above 100% from its private equity investments, including a princely 199% return last year.
"We were early in a sense," Mr. McDonald said, noting Duke became an investor in top-tier private equity partnerships when they were not so crowded "As many institutions would know, if you are not in those top-tier funds today, it can be quite difficult to gain access to them."
Duke is trying to rebalance its private equity portfolio back to its target allocation. Two-thirds of its private equity investments are in newly public companies, and it expects to be able to bring down its exposure within the next year, said Cynthia E. Frost, investment director.
Because that selloff will make its private equity position more volatile, Duke has looked at ways to hedge its risks through buying put options. But, Ms. Frost said, "We will not short the stocks that are in the partnerships, and we wouldn't enter into any swaps with banks that would short those stocks either."
When Duke set up the management company a decade ago, the allocation to private equity was approaching 10%, Mr. McDonald said.
Its other allocation targets are 23% to domestic equities; 11% developed foreign market stocks; 5% emerging market equities; 15% domestic fixed income; 15% long-short or absolute-return strategies; 7% to real estate; 7% in global opportunistic; and 5% in oil, gas, timber, inflation-linked bonds and other inflation hedges. The portfolio has a -3% cash position, intended to offset cash positions held by outside money managers.
Mr. McDonald declined to provide a list of money managers.
Duke's investment portfolio is "not a one-trick pony," Mr. McDonald emphasized. The management company has logged decent returns from other asset classes as well.
Among the strongest performers are the management company's exposure to hedge funds, part of its absolute-return strategy, which it got into in the mid-1990s, aiming to getting equity-like returns with low volatility. The management company has had an 8% benchmark "and has done about that," Ms. Frost said.
Absolute-return has been an arbitrage-driven strategy in which the management company might invest in a takeover candidate and short the acquiring stock, for example.
The management company's domestic equity strategy, which is a value and growth blend, has also beaten its benchmark over the past several years, Ms. Frost said.
Mr. McDonald anticipates Duke's investment strategy will stay largely the same under his successor, in part because the management company will probably have completed its periodic review before the new president comes on board.
The management company is scheduled to begin reviewing its investment policy at its board meeting this month and to implement any changes July 1, Ms. Frost said.
Among areas for study is an overweighting to domestic small-cap stocks, as well as possibly changing its real estate mix, currently 80% in private properties and 20% in public real estate investment trusts, she said.