Down, But Not Out

The Duke Management Company (DUMAC) reports that the largest pool of university investments lost 4.6 percent of its value for the fiscal year that ended June 30. The decline in the endowment/long-term investment pool follows a decade of robust growth that included six consecutive years of double-digit returns and the previous year's record-setting 58.8-percent performance. The university's total endowment stood at $2.50 billion at the end of the fiscal year, down from $2.66 billion at the end of fiscal 2000.

"This past year has been a tough environment for financial markets," says DUMAC's president, Thruston Morton. "U.S. stocks were down 15 percent, world stocks down 20 percent, with a high degree of volatility along the way. While we don't like negative returns, we are going to participate in the general direction of the markets."

Even with this year's negative return, DUMAC's five- and ten-year returns continue to exceed the endowment's basic goal as well as other key benchmarks, according to Morton. Duke's board of trustees has established a basic goal of a ten-year real return of inflation plus 5.5 percent. Over the past ten years, while inflation averaged 3.9 percent, Duke's investments returned 18.5 percent per annum, surpassing the real return benchmark number by more than ten percentage points.

"Our goal last fiscal year was to mitigate the downside, after the extraordinarily high returns we had the year before," says Morton. "We accomplished that goal, having less negative returns than our market benchmarks. More importantly, though, as an endowment we are properly focused on generating strong results over the long term, and we generally don't look at annual returns in isolation."

To achieve its goals, Morton says, DUMAC emphasizes investments that generate equity-like returns, "but we diversify those investments across different asset groups, such as domestic stocks, international stocks, private capital, and hedged strategies."

While some of the funds are tied up in long-term investments that can't be maneuvered in the short term, DUMAC has some flexibility with other parts of its portfolio. Even before the markets started turning downward, Morton says, DUMAC had begun to move funds out of pure equity strategies, shifting exposure into hedge funds, real estate, and fixed-income assets.

Income from the university's endowment contributed $78 million to the university's current academic year budget to support operations of academic departments, libraries, Duke Hospital, Duke Chapel, and other units, as well as financial aid to students.

DUMAC was established in 1990 by Duke's board of trustees to oversee investments of the university endowment and other university funds. The DUMAC board, which sets investment policies for the company, consists of university trustees and leading financial professionals. The company is responsible for investing about $4.5 billion in university investment assets, which range from the university endowment to smaller short-term funds for individual university departments to money for the retirement plan for biweekly employees.