Despite the market turbulence that has become the status quo on Wall Street in recent months, Penn State's endowment has weathered the past year with minimal losses, investment officials said.
The university's $1.6 billion endowment, a pool of invested financial contributions that generated more than $60 million in scholarships, professorships and other programs in 2008 alone, declined in market value by 1.9 percent between June 2007 and June 2008.
By comparison, the S&P 500 broad market index declined more than 13 percent during the same period. And although Lehman Bros.' bankruptcy, Merrill Lynch's takeover and the proposed $700 billion federal bailout broke too recently to be included in last Friday's endowment report, university investors say the turmoil has done little to affect the university's position.
"We've gone through our portfolios and statements on Friday, and we really don't have any significant exposure to any of these toxic securities," Chief Investment Officer John Pomeroy said Monday.
That's the way it should be, David Branigan, Office of Investment Management executive director, said. Operations like his fly the high altitudes of the financial markets, he said, far above the eddies and whorls of the last few weeks. His job is to make sure Penn State's endowment keeps its value and its ability to pay out the grants that university programs depend on, no matter how the market fares.
Even though the endowment's market value fell in the past year, he said, current gifts and a delayed payout system still shelling out returns from sound investments made years ago means program support should continue uninterrupted for the foreseeable future.
"Our whole existence is about maintaining that spending level every year," Branigan said. "We don't want to penalize these programs at all, because a lot of them are cash-hungry. We understand that."
Sometimes, Pomeroy added, keeping that spending level stable means turning down some investments that seem promising but carry risk -- like the bundled sub-prime mortgages that have sunk some of the leading investment firms on Wall Street in the past week. Penn State was approached some time ago with such investments, but as Pomeroy put it, the university said, "Thanks, but no thanks."
His approach is much more measured. Penn State invests in four principle areas -- domestic stocks, foreign stocks, fixed income and non-marketable alternatives. Stocks, comprising half of the university's portfolio, were the hardest hit this year, declining an average of 9.8 percent between June 2007 and June 2008. But fixed-income holdings -- mostly bonds and other secure assets -- increased by 5 percent, and alternative investments -- including energy investments and venture capital -- shot up 15.4 percent.
Penn State's 1.9-percent decline is in line with its financial peers, Branigan said, although many have yet to release public reports. And documents indicate that over the long term, Penn State has consistently outpaced other Big Ten schools in endowment growth. Penn State's investment fund has grown an average of 7.5 percent a year in the past decade, according to endowment reports, compared with a peer average of 7.0 percent.
That said, Penn State isn't taking the current market conditions lying down, Branigan said. His office has worked to reduce risk, moving more assets into bonds and reducing the spending rate.
But, Pomeroy chimes in, nor have the managers overreacted to recent events.
"The daily fluctuations, they could be gut-wrenching -- but we haven't made any changes in the portfolio last week," he said. "That just wouldn't be something we'd do."
So for now, the Office of Investment Management is quiet, sheltered from the winds buffeting Wall Street. The newscasters on the television in the conference room are worried about oil prices, but Branigan isn't. He has the luxury of taking the long view.
"When donors set up endowments they want to set up something in perpetuity -- they want something to be permanent," he said. "This is one really, really good way of doing it."
