Aug. 5–Emboldened by high returns, the guardians of the endowment at the University of North Carolina at Chapel Hill are getting into the money management business.

The state’s oldest university endowment, which has $1.1 billion in assets, recently converted itself into a private corporation that will invest for both the UNC-CH endowment and — if all goes as hoped — for the other 15 schools in the state university system, which collectively have $800 million in assets.

The nonprofit corporation, UNC Management Co., is pitching its services to smaller, less-wealthy colleges across the state that may not have the assets or the manpower to invest in the sort of private partnerships — including venture capital and hedge funds — that have enabled UNC-CH’s endowment to continue making money in a declining stock market.

The company’s president and chief executive officer, Mark W. Yusko, hopes to bring about one-half of the endowment assets held by public colleges in this state under the UNC Management umbrella. The company’s income will be distributed among each participating endowment, which is a pool of donated money that provides ongoing support to university programs.

If that were to occur today, the company would have about $1.5 billion in assets — making it the 25th-largest endowment in the nation, according to the National Association of College and University Business Officers (NACUBO). Currently, UNC-CH is ranked No. 36 in size.

But the move has already attracted some critics.

The UNC endowment has outperformed the overall stock market for the past four years, in part, by piling hundreds of millions of dollars into hedge funds — private investment pools that can use just about any strategy, from trading derivatives to swapping currencies, for making money. Hedge funds have come under tighter scrutiny from federal regulators because of their opaque reporting, and several widely publicized fraud cases that cost investors millions of dollars.

The UNC endowment has 35 percent of its assets in hedge funds, while the average university endowment nationwide has just 11 percent allocated to hedge funds, according to NACUBO.

Other state colleges could be subjecting themselves to unnecessary risk by allocating their endowment money to an investment company that has bet so heavily on a single asset class, critics warn.

“Generally speaking, it’s a bad idea to have that amount of money consolidated into the hands of a single entity,” said David Mills, executive director of the Common Sense Foundation, a liberal think tank based in Raleigh.

Others fear that, by managing money for other schools, UNC-Chapel Hill’s endowment could lose sight of its core mission — to generate the best possible return on money given to Chapel Hill, which would mean less money for scholarships, buildings and the like.

Nationwide, only a handful of colleges, including the University of Maryland at College Park and the Massachusetts Institute of Technology in Boston, manage money for other schools. Dozens more have rejected the idea due to concern that it would distract them from managing their own endowments.

“We want to stay focused on our core mission: getting the best return for this university,” said David Jarmul, associate vice president for news and communications at Duke University, which has a $3 billion endowment.

The idea for a private management company came from Yusko, 40, who was recruited five years ago from the University of Notre Dame in Notre Dame, Ind., to improve returns at the UNC-CH endowment. Yusko moved quickly to diversify the endowment into private equity, including venture capital and hedge funds. Over the past five years, the university’s allocation to stocks has slid from 55 percent to 30 percent.

As a result, the UNC-CH endowment was better insulated than most when the stock market collapsed in March 2000. The endowment has outperformed 82 percent of all endowments in the nation over the past three years. The fund posted a 1.2 percent gain in the 2001-02 fiscal year, while the Standard & Poor’s-500 stock index plunged 19.2 percent.

The fund has beaten the S&P 500 each of the past four years. The endowment’s growth can’t all be attributed to the market, however. Donations also played a part in taking it from $770 million in 1998 to $1.1 billion today.

At the same time, Yusko began pitching the idea of creating a private corporation to the board of trustees of the UNC-CH endowment. Yusko argued that, by managing money for other schools, UNC-CH could collect added fees. That money could be used to hire and retain top-notch investment managers, which meant better returns for the university’s endowment.

And by pooling assets, the new corporation would have an easier time getting the attention of large, private funds. “When you have more assets, you have more negotiating power [with funds], and that means better performance,” he said.

The UNC-CH’s endowment’s 12-member board gave unanimous approval to the concept, and earlier this year Yusko began marketing the idea to state colleges all over the state.

So far, UNC Management has collected $30 million from four schools. Yusko said he could not provide their names because they signed confidentiality agreements. The colleges will each pay management fees ranging from one-quarter to three-quarters of a percent of the assets they allocate to the company, he said.

The corporation reports directly to a seven-person board run by former Bank of America chief executive Hugh McColl, who now runs his own private buyout firm. The board includes four UNC administrators, including Chancellor James Moeser.

Because UNC Management pools assets from other schools and does not manage securities directly, it does not have to register with the U.S. Securities and Exchange Commission or file regular financial statements. However, the company’s board will receive an update of its performance each quarter, Yusko said.

Still, the university’s large allocation to hedge funds may intimidate other schools in the state system, warned Tony Plath, a professor of finance at the University of North Carolina at Charlotte. Hedge funds frequently use borrowed money to amplify their returns. When they fail, the institutions and wealthy individuals that invest in them lose millions.

But Yusko said the company’s investment in hedge funds is widely diversified. Currently, UNC Management has money in 40 hedge funds, and none of those holdings account for more than 1 percent of the company’s assets. “No one single hedge fund investment is going to throw off our performance,” he said.

As for the potential for distraction by managing other schools’ money, Yusko said he isn’t worried. It would be more distracting, he said, if the endowment lost some of its top investment managers because they got better offers from other schools.

“This is a pioneering opportunity,” said Yusko. “And people here like the fact that we are providing a service to other schools.”

—–

To see more of The News & Observer, or to subscribe to the newspaper, go to http://www.newsobserver.com.

(c) 2003, The News & Observer, Raleigh, N.C. Distributed by Knight Ridder/Tribune Business News.

BAC,

Aug. 5–Emboldened by high returns, the guardians of the endowment at the University of North Carolina at Chapel Hill are getting into the money management business.

The state’s oldest university endowment, which has $1.1 billion in assets, recently converted itself into a private corporation that will invest for both the UNC-CH endowment and — if all goes as hoped — for the other 15 schools in the state university system, which collectively have $800 million in assets.

The nonprofit corporation, UNC Management Co., is pitching its services to smaller, less-wealthy colleges across the state that may not have the assets or the manpower to invest in the sort of private partnerships — including venture capital and hedge funds — that have enabled UNC-CH’s endowment to continue making money in a declining stock market.

The company’s president and chief executive officer, Mark W. Yusko, hopes to bring about one-half of the endowment assets held by public colleges in this state under the UNC Management umbrella. The company’s income will be distributed among each participating endowment, which is a pool of donated money that provides ongoing support to university programs.

If that were to occur today, the company would have about $1.5 billion in assets — making it the 25th-largest endowment in the nation, according to the National Association of College and University Business Officers (NACUBO). Currently, UNC-CH is ranked No. 36 in size.

But the move has already attracted some critics.

The UNC endowment has outperformed the overall stock market for the past four years, in part, by piling hundreds of millions of dollars into hedge funds — private investment pools that can use just about any strategy, from trading derivatives to swapping currencies, for making money. Hedge funds have come under tighter scrutiny from federal regulators because of their opaque reporting, and several widely publicized fraud cases that cost investors millions of dollars.

The UNC endowment has 35 percent of its assets in hedge funds, while the average university endowment nationwide has just 11 percent allocated to hedge funds, according to NACUBO.

Other state colleges could be subjecting themselves to unnecessary risk by allocating their endowment money to an investment company that has bet so heavily on a single asset class, critics warn.

“Generally speaking, it’s a bad idea to have that amount of money consolidated into the hands of a single entity,” said David Mills, executive director of the Common Sense Foundation, a liberal think tank based in Raleigh.

Others fear that, by managing money for other schools, UNC-Chapel Hill’s endowment could lose sight of its core mission — to generate the best possible return on money given to Chapel Hill, which would mean less money for scholarships, buildings and the like.

Nationwide, only a handful of colleges, including the University of Maryland at College Park and the Massachusetts Institute of Technology in Boston, manage money for other schools. Dozens more have rejected the idea due to concern that it would distract them from managing their own endowments.

“We want to stay focused on our core mission: getting the best return for this university,” said David Jarmul, associate vice president for news and communications at Duke University, which has a $3 billion endowment.

The idea for a private management company came from Yusko, 40, who was recruited five years ago from the University of Notre Dame in Notre Dame, Ind., to improve returns at the UNC-CH endowment. Yusko moved quickly to diversify the endowment into private equity, including venture capital and hedge funds. Over the past five years, the university’s allocation to stocks has slid from 55 percent to 30 percent.

As a result, the UNC-CH endowment was better insulated than most when the stock market collapsed in March 2000. The endowment has outperformed 82 percent of all endowments in the nation over the past three years. The fund posted a 1.2 percent gain in the 2001-02 fiscal year, while the Standard & Poor’s-500 stock index plunged 19.2 percent.

The fund has beaten the S&P 500 each of the past four years. The endowment’s growth can’t all be attributed to the market, however. Donations also played a part in taking it from $770 million in 1998 to $1.1 billion today.

At the same time, Yusko began pitching the idea of creating a private corporation to the board of trustees of the UNC-CH endowment. Yusko argued that, by managing money for other schools, UNC-CH could collect added fees. That money could be used to hire and retain top-notch investment managers, which meant better returns for the university’s endowment.

And by pooling assets, the new corporation would have an easier time getting the attention of large, private funds. “When you have more assets, you have more negotiating power [with funds], and that means better performance,” he said.

The UNC-CH’s endowment’s 12-member board gave unanimous approval to the concept, and earlier this year Yusko began marketing the idea to state colleges all over the state.

So far, UNC Management has collected $30 million from four schools. Yusko said he could not provide their names because they signed confidentiality agreements. The colleges will each pay management fees ranging from one-quarter to three-quarters of a percent of the assets they allocate to the company, he said.

The corporation reports directly to a seven-person board run by former Bank of America chief executive Hugh McColl, who now runs his own private buyout firm. The board includes four UNC administrators, including Chancellor James Moeser.

Because UNC Management pools assets from other schools and does not manage securities directly, it does not have to register with the U.S. Securities and Exchange Commission or file regular financial statements. However, the company’s board will receive an update of its performance each quarter, Yusko said.

Still, the university’s large allocation to hedge funds may intimidate other schools in the state system, warned Tony Plath, a professor of finance at the University of North Carolina at Charlotte. Hedge funds frequently use borrowed money to amplify their returns. When they fail, the institutions and wealthy individuals that invest in them lose millions.

But Yusko said the company’s investment in hedge funds is widely diversified. Currently, UNC Management has money in 40 hedge funds, and none of those holdings account for more than 1 percent of the company’s assets. “No one single hedge fund investment is going to throw off our performance,” he said.

As for the potential for distraction by managing other schools’ money, Yusko said he isn’t worried. It would be more distracting, he said, if the endowment lost some of its top investment managers because they got better offers from other schools.

“This is a pioneering opportunity,” said Yusko. “And people here like the fact that we are providing a service to other schools.”

—–

To see more of The News & Observer, or to subscribe to the newspaper, go to http://www.newsobserver.com.

(c) 2003, The News & Observer, Raleigh, N.C. Distributed by Knight Ridder/Tribune Business News.

BAC,