WINSTON-SALEM, N.C. - Officials at Wake Forest University's $900 million endowment are thinking globally.
"We're attempting to reconstruct our portfolio to make it as global as possible," said Louis R. Morrell, vice president for investments and treasurer at Wake Forest. "We see the world becoming more global and are attempting to find managers that can do that."
When Mr. Morrell joined the university in 1995, the endowment's allocation was 65% domestic equities and 35% U.S. investment-grade bonds. Now the fund has 43% of its assets in U.S. equities, 11% in international equities, 5% in private equity, 6% in venture capital, 6% in an absolute-return strategy, 6% in hedge funds, 7% in U.S. investment-grade bonds, 8% in convertibles, 4% in high-yield bonds, and 4% in inflation-indexed bonds. All the assets are actively managed. The endowment has no emerging market equities, international bonds or commodities investments, although managers in related areas have the discretion to move small portions of their mandates into those asset classes on an opportunistic basis.
Mr. Morrell also is considering specific investments in a high-yield commercial mortgage fund and a real estate fund. He has committed $15 million to the new Warburg Pincus Partnership VIII private equity fund, which is scheduled to close in June. This is the endowment's third investment in a Warburg Pincus private equity fund.
When Mr. Morrell joined the university, it had assets of $470 million. His investment strategies have resulted in an annualized return of 19.5%. The university measures its return against several benchmarks of its own design, including how the fund would have done if it were all passively managed.
A study by the National Association of College and University Business Officers, which measured the investment performance of universities, ranked Wake Forest 23rd out of 417 universities for the five-year period ended June 30, 1999, the most recent data available, and 48th for the three-year period.
Mr. Morrell also believes in using tactical asset allocation "to take advantage of times in the investment world when assets are overpriced or underpriced."
But he does not use traditional TAA, which he said "doesn't work." Instead of relying on a "black box," he personally follows a wide range of economic factors and uses them to make his own decisions about where to move the endowment's money.
In March, for instance, Mr. Morrell thought "the Japanese market was undervalued, and we took the opportunity to invest before the market corrected itself." He moved $8 million of the endowment's $90 million Fidelity International sector funds investment into the Boston-based manager's Japan Fund, which gained 11% in April.
The endowment has given Nicholas-Applegate Capital Management, San Diego, a $25 million global equity mandate to invest in technology and health-care mutual funds. But the manager has leeway to move the money into domestic small-cap value stocks if it thinks that's where to find the best returns at the moment, said Mr. Morrell.
The endowment also recently moved $3 million into cyclical industries mutual funds and $1 million into mutual funds investing in industrial-materials stocks and corporate bonds. It is also using a convertible arbitrage strategy. Mr. Morrell expects all these investments to produce higher returns for the endowment than communications networking and infrastructure, health care and biotechnology, which he says have been "slow to recover."
"When the economy started to turn around, we moved money into cyclical industries stocks," he said. "At the strategic level, there is the potential for doing more innovative work if you look at sectors instead of countries."
"Every day, we move money around tactically" after reviewing the economic indicators, often using Fidelity's sector funds, Mr. Morrell said. "Now the telecommunications sector is gone, so we move money into an area with more growth," such as cyclical industries or industrial materials.
Hotchkis and Wiley, which is now part of Merrill Lynch Investment Advisors, New York, uses a value style in managing the endowment's international developed markets assets. The firm also has the authority to move money into the U.S. market or into emerging markets, Mr. Morrell said. "It's a practical approach with a global mandate."