PRINCO reallocates investments in search for more liquidity

The Princeton University Investment Company, which manages the University's endowment, has slightly adjusted its allocations to include a higher percentage of investments in comparatively more liquid assets. The new financial management strategy, called "Princeton Prime," was disclosed in an annual report on the endowment prepared by the Office of the Treasurer.

In addition, theReport of the Treasurer explained that the endowment, despite its growth, had responded to the economy's recovery more slowly than the market as a whole in recent years.

“We would have done better this year if we had kept [our asset allocation strategy] simple,” the report read. “Indeed, 'simple' has beaten 'complex' over the most recentfive-year span. But focusing on 'this year' and 'most recent' is no way to design a long-term investment program.”

PRINCO manages $17.8 billion of the university’s $18.2 billion endowment.

The change in allocations comes almost four years after Princeton created a special "liquidity fund" to support the University in the case of a new economic downturn.

The endowment has typically been managed through what is known as the Yale Endowment Model, a method of endowment management developed at Yale that prioritizes investing in low-liquidity assets to optimize return while minimizing the risk of losing the investment. However, illiquid assets are hard to sell in the short term in order to support the University's operations.

“When you look at the biggest exposures [in the endowment] – things like private equity or real assets –those are what we in the investment business call illiquid assets, which you can’t sell right away,” G. Scott Clemons ’90, managing director at Brown Brothers Harriman, said. Clemons has commented on previous articles about the Yale endowment, and Brown Brothers Harriman is the largest private bank in the United States.

President of PRINCO Andrew Golden was unavailable for comment. Provost David Lee '99 deferred comment to Golden.

Not all investors can carry such highly illiquid assetsas endowments like that of the University, Clemons said.

“Princeton is an institution that will ostensibly go on forever, and they do not pay taxes, and furthermore, Princeton has the benefit of other sources of income,” Clemons said.“So Princeton can afford to hold a higher proportion of illiquid assets ... than you or I could because we would have to pay taxes.”

Although the University has a high tolerance for illiquidity, this high tolerance sometimes comes at a price. When the stock market crashed in 2009, the illiquidity of the University’s endowment meant that the school had to make budget cuts to cover its short-term needs.PRINCO is now shifting its targets to increase liquidity in response to the financial difficulties it encountered in 2009.

However, some investors say liquidity isn’t the only factor driving the change.

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Samuel K. Won, founder and managing director of Global Risk Management Advisors, said that he believes the slow global economic recovery also had a role to play in PRINCO’s decision. Global Risk Management Advisors is a firm that provides risk management services for endowments and foundations.

“If we’re going through some economic recovery, one of the asset classes that will likely benefit is equities,” said Won. “So it’s not uncommon for endowments to start decreasing their holdings in fixed income and increase equity holdings. In our assessment, there is nothing unusual about what Princeton is doing in rebalancing the investment portfolio.” An equity is a share of ownership in some asset, while fixed income refers to any sort of investment under which the borrower must make fixed payments on a fixed schedule.

The University saw its highest returns last year on internationally developed markets equity, 33.6 percent, and domestic equity, 21.5 percent. The asset classes whose targets have decreased generated lower returns. Independent return, which consists of privately managed investments such as hedge funds, earned 16.5 percent.

Clemons says he thinks very highly of how the endowment is managed, both as an alumnus and as someone with financial expertise.

In addition to setting goals for liquidity, PRINCO is making an effort to reallocate its endowment more broadly. PRINCO now aims to keep8 percent of the endowment, up from 6.5 percent, in domestic equities, or stocks publicly traded on U.S. stock exchanges.

It has also increased its target for international developed markets equities from 5.5 percent to 6 percent.

On the other end of the spectrum, the new target for independent return dropped from 25 percent to 24 percent. The percentage of the endowment to be invested in bonds and cash was reduced from six to five percent.

Last month, the University released its annual budget report, forecasting smaller endowment returns in the future.

“It would be unwise to develop budgets that depend on returns resembling the bull markets of the 1990s,” the report read. “In the decade ahead, we will need to managegrowth with careful attention to optimizing resources to best support our priorities.”