CHICAGO - The $3.7 billion University of Chicago endowment fund plans to refine its list of some 80 limited-partnership relationships after its private equity investments produced a whopping 244.7% return for the 12 months ended June 30.
Philip Halpern, the university's vice president and chief investment officer, who oversees the endowment, said the fund will focus more closely on the kinds of relationships it has.
"Frankly, that's a lot," he said of the 80-plus relationships.
He wants the endowment fund to emphasize partnerships with which it can have "significant and meaningful" relationships, meaning the opportunity to invest more money. Future partnerships will meet those same criteria, he said. Many "blue-chip" venture capital funds, as he calls the most successful and sought-after, limit the amount investors can invest to control the high demand.
Mr. Halpern wants to focus the school's venture capital relationships on those in which the endowment can have a more significant financial stake. That will involve working with the school's in-house private equity team, which recently expanded from two people to three.
"We are looking for a competitive advantage, strategic alliances with advisers, and ways we can add value," he said.
He has no plans to recommend changes to the fund's private equity allocation, which at $792 million "is slightly above 22%" of the endowment's total assets.
In the future, the school will become a much more sophisticated player in the international private equity market, Mr. Halpern predicted.
Such refinement is typical of the kinds of moves Mr. Halpern has directed since coming to Chicago in July 1998 from the California Institute of Technology, Pasadena, where as treasurer his duties included overseeing its then-$1.3 billion endowment fund.
Under Mr. Halpern, the Chicago fund has reallocated its investments to focus more on private equity, increasing the allocation from 10% when he arrived.
Diversified allocation
Some 65% of the fund's private equity investments are in venture capital. Another 10% are in international private equity, although some domestic private equity partnerships also have a small part of their investments in international. The rest is in domestic areas of corporate buyouts, opportunistic real estate and special situations. The opportunistic real estate investment has a business operations component, he said.
The rest of the fund's asset allocation consists of 5% high-yield bonds; 10% absolute return strategies; 8% real assets, including timber, natural gas, and equity real estate; 10% international developed markets equities; 5% emerging markets equities; 15% domestic fixed income; and 25% U.S. equities, mostly indexed.
Before his arrival, the fund's allocation was: 10% real assets; 5% international developed markets; 5% emerging markets equities; 15% domestic fixed income; and 55% U.S. equities. And just before he arrived, the university was beginning the process of moving away from exclusive internal management of its assets.
In international developed markets equities, the fund employs Oechsle International Advisors LLC, Boston, which has a growth style tilt; Bank of Ireland Asset Management (U.S.) Ltd., Greenwich, Conn., which has a value tilt; and Capital Guardian Trust Co., Los Angeles, which invests in small-cap. The managers in aggregate are benchmarked to the unhedged Morgan Stanley Capital International World Ex-U.S. index.
In emerging markets equities, it uses Capital Guardian and Emerging Markets Investors Corp., Arlington, Va., the latter of which has a concentrated portfolio.The fund benchmarks these managers to the unhedged MSCI Emerging Markets Free index.
The developed and emerging markets managers have discretion to hedge currencies.
In spite of the weakening euro, Mr. Halpern said, "I'm a big fan of Europe. I am concerned about it (the declining euro) in the short term. People are surprised the euro has been as weak as the yen or dollar has been as strong."
In high-yield bonds, the fund has portfolios managed by Morgan Stanley Dean Witter & Co., New York, and Penn Capital Management, Cherry Hill, N.J. It also invests in private mezzanine and distressed debt funds, as part of its high-yield bond allocaiton.
In its real asset allocation, the endowment uses a number of managers and investment funds. Two of them he will name are AMB Investment Management Inc., San Francisco, which has an industrial focus to its real estate portfolio, and TA Associates, Boston, which has a diverse real estate portfolio.
Before Mr. Halpern's arrival, the real estate primarily was internally managed. Earlier this year, the endowment sold its so-called triple-net-lease investment, "a form of leasing where the tenant manages the property," Mr. Halpern said. It consisted of office and industrial property around the country. He declined to give its value.
"We took it to auction and wound up selling it to" the California State Teachers' Retirement System, Sacramento, he said. "We aren't focused to be a real estate company," he said.
No fan of long-short
In the absolute strategies, he declined to give details, noting that they include non-directional and arbitrage strategies "where there is very little market risk."
"We don't do a lot of long-short," another absolute strategy, he said. "I've never been a big fan of long-short strategies."
The fund's U.S. equities are 90% passively managed by Barclays Global Investors, San Francisco, to the Russell 1000 index.
Part of the U.S. equities are in actively managed small-cap stocks run by Blum Capital, a unit of Richard C. Blum & Associates LP, San Francisco, and Fiduciary Management Inc., Milwaukee. Blum invests in publicly traded equities and takes an active role in the corporate governance of many of them, including as directors on their boards. Fiduciary Management uses a value tilt in investing.
The endowment's overall U.S. equities benchmark is the Russell 3000 index.
The fund internally manages an "aggressive" tactical asset allocation strategy, overlaid on several asset classes, including high-yield bonds. Mr. Halpern declined to elaborate on the TAA.
Its fixed income is managed internally by Carla McGuire, assistant vice president. She invests only in Treasury and government agency securities, looking for inefficiencies and opportunities where she can and managing the rest of the portfolio more passively. Ms. McGuire also oversees the high-yield bond area and real estate and works with Matt Stone, portfolio manager, in the absolute-return area. Liz Allison oversees private equity.
Private equity key
Across all its asset allocations, the endowment fund earned a 40.9% return for the 12 months ended June 30, Mr. Halpern said. The fund's three-year average annualized return was 23.8% and its five-year annual return, 22.5%."If you looking at most portfolio returns, the wide variance is attributable to the allocation to private equity," Mr. Halpern said. "That one decision was a major one; the other decisions were minor. People can look real smart or real stupid based on that decision."
Mr. Halpern credits the endowment fund's strong investment performance to allocation to private equity and work of the investment committee of the board of trustees and Michael Borrelli, who was assistant vice president for investments and who died in May 1999.
"Michael really helped with the committee in beginning the private equity program," Mr. Halpern said. "He, along with the investment committee, was able to pick excellent partnerships. I built on their beginning efforts."
Mr. Halpern oversees the endowment fund from the school's off-campus Gleacher Center situated downtown along the Chicago River. He reports to the investment committee and the university's president, Don Michael Randel, who is also a trustee. He and his staff of 14 are evaluated and compensated based on the fund's performance.
The six members of the investment committee are: J. Parker Hall, chief executive officer and managing director, Lincoln Capital Management Co., Chicago; Jon S. Corzine, former chairman and CEO of Goldman, Sachs & Co., now the Democratic candidate for the U.S. Senate in New Jersey; James S. Crown, general partner in Henry Crown & Co.; Richard J. Franke, former chairman and CEO, The John Nuveen Co.; Eric F. Gleacher, chairman and CEO of Gleacher & Co., LLC ; and Martin L. Liebowitz, chief investment officer, TIAA-CREF.
