March 7, 2001:
Princeton's endowment investments return big rewards
By Allan Demaree
is a wonder to behold. It has grown to the point that the university's
trustees decided in January to increase spending from it by $57
million, or 27 percent, next year. This extraordinary leap, which
will finance initiatives ranging from freshman writing seminars
to the new "debt-free" student-aid policy, is by far the
biggest spending increase in Princeton's history.
Starting with £185
pledged by 10 men in 1745 - not enough to pay the president's salary,
as it turned out - the endowment has swelled to $8.4 billion. That's
the largest in the nation for a school Princeton's size and third
largest among all private U.S. universities (after Harvard and Yale).
The endowment contributes more to Princeton's operating budget than
any other source, including tuition and fees, sponsored research,
and gifts and grants such as Annual Giving. Little wonder that President
Harold Shapiro calls the endowment "the critical component
in determining what's possible for us here at Princeton to aspire
to." Which raises the question, how has the endowment been
The answer is a bit like
Henny Youngman's reply to the question, "How's your wife?":
"Compared to what?"
By one measure, the endowment
has been doing superbly. To support future generations of students
as well as it has supported generations past, its growth has to
keep pace with the rising cost of providing higher education. Over
the past decade, educational costs have risen some 45 percent. During
the same period, the endowment grew five times that fast.
By another measure, the
news is somewhat less rosy. Fifteen years ago, Princeton's endowment
ranked second among private universities, leading third-place Yale
by more than $200 million. Now Yale is ahead by $1.7 billion. Top-ranked
Harvard has stretched its lead over Princeton from $1.2 billion
in 1985 to $10.7 billion today (see chart, page 20).
Three major factors determine
an endowment's growth:
1) how much it receives
in gifts, 2) how much it contributes to university spending, and
3) how successfully its assets are invested. This article looks
at Princeton's investment performance. For the influence of other
factors, see "Playing the numbers" on page 20.
engine has been running on jet fuel lately. Last fiscal year (ended
June 30, 2000) the endowment earned 35.5 percent versus 7.2 percent
for the Standard & Poor's 500 Index. That was the best one-year
performance since 1983 - and poured some $2 billion into Princeton's
Over the longer term,
Princeton's compound annual return came to 17.1 percent for the
1990s, earning the university more than $7.5 billion. While comparable
numbers for all university endowments have yet to be compiled, these
results will almost certainly rank Princeton's performance in the
top 10 percent for the decade. Princeton outperformed Harvard, which
had a 17 percent return, and underperformed Yale, which had a 17.5
A company called Princo
(for Princeton University Investment Company) oversees the investments.
Headed since 1995 by Andrew Golden, 41, a curly-haired elf who once
managed money for Duke and Yale, Princo's 10 professionals operate
out of a Georgian brick building on Chambers Street, a short walk
from Nassau Hall. Princo is "a manager of managers." That
is, it farms out chunks of the endowment - $50 million here, $100
million there - to some 100 firms that pick specific stocks, bonds,
or other investments in areas of their expertise.
Overall policy is set
by Princo's 12-member board of directors, which reports to the university's
trustees. The board is made up of three university officials, including
President Shapiro, and nine alumni with extensive investment experience.
Their major decisions involve how much risk to take, considering
that greater risks should ultimately yield greater rewards, and
how to allocate assets among major investment categories (such as
real estate, venture capital, and international equities).
Endowments as rich as
Princeton's have advantages over individual investors. Because they
exist for perpetuity, they can take the long view, and because their
pockets are deep, they don't have to sell out at the worst time,
when fear stalks the markets and prices collapse.
This allows them to be
contrarian, buying assets that are out of favor and holding until
they pay off. Golden says, "My job is to 'optimize discomfort'
- push us to the limit of doing things that are uncomfortable, because
that's the way you make money, but not so far that we later become
so uncomfortable we abandon the plan we started with."
The plan Princo has been
operating under was fashioned largely by Richard B. Fisher '57,
former head of investment bank Morgan Stanley & Co., who became
Princo's chairman in 1990. Before that, Princo had been a "plain
vanilla" investor, mainly holding publicly traded stocks and
bonds. Fisher and his colleagues on the Princo board greatly increased
Princeton's holdings of more exotic investments - hedge funds, emerging-markets
securities, and "alternative assets," which include real
estate, venture capital, and other relatively risky private-equity
investments. Compared with Harvard, Yale, Stanford, and Duke, Princeton
was late getting into these investments and was eager to catch up.
To jump-start the alternative-assets
operation, Fisher and his colleagues created a new vehicle called
Nassau Capital. Formed in 1995 by Randall A. Hack '69 and three
partners, Nassau Capital invested in alternative assets on behalf
of Princeton and the partners themselves, increasing Princeton's
stake in these assets to more than one-quarter of the entire portfolio.
Altogether, Nassau Capital invested $2.5 billion of Princeton's
money, having a huge impact on the endowment's performance (see
"Adieu, Nassau Capital," page 22).
For a time, some of Princo's
bets looked highly questionable. Fisher and his colleagues diversified
away from major U.S. stocks, partly because they figured that, after
burning up the track in the 1980s and early 1990s, these equities
were due to cool off. At one point, Princo used "swaps"
and futures contracts to shift nearly one-eighth of the endowment
from domestic to international exposure. That left the university
underinvested in U.S. stocks just as the market galloped off on
a thundering bull run.
Princeton's returns in
1997 and 1998 were respectably in the high teens but lagged behind
what a more traditional portfolio - invested 65 percent in U.S.
stocks and 35 percent in U.S. bonds - would have achieved. Using
this comparison, Princo's 1997 report to the trustees forthrightly
judged Princeton's returns to be "very weak." The following
year's report, using the same yardstick, declared Princeton's results
Today, some of the alumni
who participated in Princo's decisions concede that the board guessed
wrong. John Bogle '51, founder of the Vanguard mutual fund group,
says, "The bets were bad. . . . The heavy bet on international,
especially on emerging markets, was just plain wrong, and badly
wrong." Fisher says, "We were wrong on our assessment
of what the U.S. market was going to do."
Having been involved
with Princeton's finances for 21 years and having headed Princo
for eight, Fisher passed the torch in July 1998 to Edward E. Matthews
'53, vice chairman of American International Group, a huge insurance
company with over $300 billion in assets. Matthews had served with
Fisher on the Princo board for years, and like Fisher was a formidable
force in the financial world; he was, for example, the prime mover
behind AIG's entering the aircraft-leasing and financial-derivatives
businesses, which together now earn the company $1.3 billion a year.
No sooner had Matthews
taken over than the international investments took a turn for the
worse. Asian markets were already roiling from economic troubles
when, in August, Russia devalued the ruble and defaulted on its
international debts. Investors fled emerging-market securities,
of which Princeton had a passel, and a selling panic spread to Europe.
"I came in,"
Matthews recalls, "and in the next two months the endowment
lost 9 percent of its value. That was not a happy report I made
to the Board of Trustees in September. When things like that happen,
you begin to question yourself: 'Do I have this thing right?' "
But like Fisher before
him, Matthews was not about to crumble in the face of short-term
adversity. When emerging-market stocks got pummeled, he and the
other Princo directors coolly reassessed whether these investments
"The Princo board
is a very sophisticated group of investors," says John Scully
'66, managing director of the California merchant banking firm SPO
Partners & Co. "They've been around a long time and have
seen a lot of down markets. The visceral reaction when things like
this happen is usually to ask, 'Should we redouble the bet?' "
In fact, the board did decide to increase Princeton's stake - just
in time to catch a rousing, 44 percent run-up in emerging-market
stocks over the first six months of 1999.
As the decade closed,
it became clear that many of the changes made during Fisher's tenure
were paying off like Regis Philbin. As Bogle says, "While the
decisions didn't look so good five years ago, last year they looked
absolutely brilliant." Take, for example, two asset classes
that were new to Princeton when Fisher's chairmanship began:
Hedge funds. Starting
from scratch in 1990, Princo shifted nearly one-quarter of the endowment
into hedge funds. For several well-known hedge-fund managers, 2000
was a year of disaster. George Soros, who once made over $1 billion
in a single day speculating against the British pound, and Julian
Robertson of Tiger Management, for years one of the best hedge-fund
managers, both suffered reversals and dramatically retrenched. But
Princeton's hedge funds consistently kept earning around 20 percent
Why, when the big names
fared poorly? Primarily because Princo steered clear of the huge
global gambles Soros and Robertson took on commodities and foreign
currencies. Instead, it relied on managers who earned consistent
profits, a little at a time, by investing on the basis of specialized
expertise, such as figuring out when regulators will approve a merger
or assessing the worth of a bankrupt company's debt. Not as exciting,
perhaps, as speculating against the pound, but more profitable in
the long run.
Venture capital. The
value of Princeton's venture-capital investments rose to stratospheric
heights last year, benefiting from a sizzling market in initial
public offerings. Companies that didn't even exist a few years ago
were, in early 2000, trading at hugely inflated multibillion-dollar
valuations. While this was great news for Princeton on paper, it
was also scary. Many of Princeton's shares in these companies were
tied up in limited partnerships, subject to restrictions preventing
their sale. If the market bubble burst, so would Princeton's profits.
At a meeting in December
1999, the Princo board said, as Scully puts it: "Let's take
money off the table as aggressively as possible - and aggressively
means now, not tomorrow." Golden and his team canceled their
Christmas vacations to construct what Scully calls "an absolutely
A+ program" of hedges for each of 22 newly public stocks in
Less than three months
later, these stocks did indeed tumble. Ten fell by 90 percent or
more; one dropped 99 percent. The hedging program preserved more
than $215 million in profits - "very, very meaningful"
money, says Matthews - that would otherwise have evaporated. Princeton's
venture-capital investments ended fiscal 2000 up by more than 200
After Princo closed the
books on this extraordinary year last June, the slide that had savaged
technology stocks spread to the broader market, driving the S&P
500 down nearly 9 percent by January. Yet Princeton's portfolio
was up more than 4 percent. The hedge funds had double-digit returns,
while even Princeton's U.S. stocks, tilted toward small companies
with a "value" orientation, were solidly in the plus column.
This left the Board of
Trustees facing the happiest of problems when they met in late January:
The endowment had grown so large that annual distributions had fallen
far below the 4 to 5 percent of assets that the university believes
it can afford to spend. Hence the ability to increase endowment
spending to $284 million for next academic year, with much of the
new money going to aid poor and middle-income students, bolstering
Princeton's commitment to attracting the best young scholars without
regard for their ability to pay. Discussing the "problem"
of having too much money, Matthews says, "I told Harold [Shapiro]
and the board that the directors and staff of Princo are going to
do everything in their power to re-create the same problem all over
Most fundamentally, Princeton's
financial success, as with that of other major universities, has
bolstered its position as an independent source of ideas. Whether
in hiring a controversial professor like Peter Singer or in advocating
reforms that may offend vested interests, Princeton - girded by
the power of its endowment - is better able to propound unconventional
thoughts without fear of having its purse strings clipped.
Allan Demaree '58 is
a former executive editor of Fortune.
Different factors affect endowment measuring
The chart to the right
shows that Princeton's endowment has grown some 450 percent over
the last 15 years, while Yale's and Harvard's have each grown more
than 600 percent. All three are doing remarkably well, to be sure,
but if Princeton had amassed assets as fast as Yale, it would now
be $3 billion richer. On the endowment express, why is Princeton
riding the caboose?
First, the numbers are
somewhat misleading. Even though they are "official" -
submitted to the National Association of College and University
Business Officers and widely quoted as gospel in the press - they
are not strictly comparable. Example: Harvard includes in its endowment
more than $300 million in pledges, money promised but not yet received.
Princeton excludes pledges from its endowment total.
That said, Princeton
has still been losing ground faster than its investment performance
would suggest. The university's officials like to believe this is
because Princeton has spent more of its endowment on current programs
than Harvard and Yale. "We are just a little less conservative
than our key peers," says President Shapiro.
not entirely correct. Princeton has spent more endowment money per
student - about $36,000 last academic year, versus $30,000 for Harvard
and $26,000 for Yale - but Princeton's student body is smaller.
(Princeton had 6,324 students, while Harvard had 18,541 and Yale
10,870.) When you examine spending as a share of endowment assets,
it turns out that Princeton actually spent less last year than the
other two schools (3.6 percent versus 3.9 percent for Harvard and
A major reason for Harvard's
growing lead is simply arithmetic. Harvard started the period with
over $1 billion more than Princeton, so its investment returns were
multiplied by a much bigger base. That factor alone swelled Harvard's
lead by several billion dollars.
Gifts are another ingredient.
In the last two years, Harvard's endowment took in $487 million,
Yale's $221 million, and Princeton's $159 million. "Bigger
places just do more fundraising," says Shapiro.
Yale's endowment has
been subtly bolstered another way as well. In the last five years,
Yale more than doubled its debt to over $1 billion, mainly to finance
much-needed campus renovations. By borrowing more, Yale could spend
less of its endowment assets.
Princeton has long had
bragging rights in one crucial respect - endowment dollars per student
(see chart, right). As much as any other single number, this one
manifests the university's ability to underwrite a high-quality
education. But with the changes in endowment values, Princeton's
lead has been shrinking here, too. If the trend continues, it will
Nassau Capital was founded
on the principle that Princeton could make money by harnessing its
interests to those of a small group of high-energy, high-intellect
Randy Hack '69 came up
with the concept. After a successful career in real estate, he headed
Princo's staff until 1995, when the board decided to turbo-charge
Princeton's expansion into private equity and real estate. Hack's
idea was that he and three partners would make these investments
for the university - and for themselves. By investing side by side
with the university, they would have a powerful financial incentive
to make money for Princeton.
Make money Princeton
did. Over five-and-a-half years, the university gave Nassau Capital
$2.5 billion to invest. By the end of that time, Nassau Capital
had handed $2.3 billion back to Princeton and still held investments
worth $2.5 billion to the university.
Nassau Capital invested
two ways, through funds and directly in private companies. Most
of the money went to 80-odd firms that managed real-estate and private-equity
funds. While real estate has been fairly quiescent, many of the
private-equity funds exploded in value as the companies they owned
went public in the frenzied market of 1999-2000.
While investing with
the funds, Hack hoped to discover "coinvestment" opportunities
as well - chances to invest directly in some of the hottest outfits
the funds owned. One of his biggest hits, for example, came when
a couple of Nassau Capital representatives attended a 1997 conference
at Accel Partners, a California venture-capital firm, where they
met the founder of a small company called Portal Software, in which
Accel had already invested.
Portal looked promising.
It produced state-of-the-art software that helped Internet and communications
companies manage billing and other customer relationships. It also
had another attraction. Nassau Capital wanted, as Hack says, "to
break new strategic ground for university endowments by aggressively
cultivating Princeton's alumni body." As it happened, Portal's
founder, John Little, was a member of the Class of 1980.
Hack flew to California
to have lunch with Little at an Italian restaurant in Palo Alto.
His pitch went something like, "Wouldn't it be great, John,
if Princeton could invest in Portal, and if it's a success, this
is an additional way you'll really feel good?"
Little cottoned to the
Princeton connection, too. "Lots of people have money,"
he says. "Having Princeton as an investor was a special bonus.
For one thing, if we made money for Princeton, I thought I'd never
get another call from Annual Giving."
Nassau Capital didn't
actually invest in Portal until it had performed due diligence and
pulled another Princeton string. Uncertain whether Portal's software
would be widely adopted, Hack retained Ira H. Fuchs, then Princeton's
vice president for computing and information technology, who quietly
sounded out contacts at Microsoft, AOL, MCI, and other potential
Portal customers. Hack says Fuchs reported back that, within days,
Microsoft was expected to sign an important contract with Portal.
Thus reassured, Nassau
Capital invested $4.5 million. Sixteen months later, in May 1999,
Portal went public, and Nassau Capital realized a $260 million profit
- nearly 60 times its investment. (Like many technology stocks,
Portal's shares got clobbered last year, dropping 94 percent from
their high, but by then Nassau Capital had made its money and sold
As has been said of the
missionaries who went to Hawaii to convert the natives and ended
up owning the place, Nassau Capital's partners and employees have
done well by doing good. They invested more than $20 million of
their own money, and while they won't disclose their profits, their
returns should fairly well mirror Princeton's. Princeton earned
compound annual returns of 13.9 percent on real estate and 49.9
percent on private equity. And these figures may understate the
final results, since most of the direct investments are still carried
Now the Nassau Capital
era is winding down. Though it was highly successful, the potential
for conflicts - that the partners might want to make investments
Princeton didn't, for example - led the trustees to change the relationship
last year (PAW, November 22). Princo took back the fund investments.
Hack and partner John Quigley, 46, are putting the firm's remaining
cash into direct investments and will "harvest" those
already made. Quigley, under the name Nassau Invetment Partners,
will continue making direct investments for Princeton.
Once Nassau Capital's
operations are wrapped up, Hack's plans are unclear, but he says
he feels "extraordinarily fortunate" to have played a
major role in the endowment's restructuring and hopes to stay involved
with Princeton. "With my daughter just admitted to the Class
of 2005," he says, "I won't be far away."