THE NEXT TEN YEARS: Building upon successful strategies

The Treasury Office at the University of Washington is responsible for managing $1.9 billion in operating and endowment funds. Ten years ago the University ranked in the bottom quartile of the NACUBO (National Association of College and University Business Owners) endowment performance universe. Today it's a top quartile performer.

Pugh Capital spoke with V'Ella Warren, Treasurer and Susan Ball, Senior Associate Treasurer about this achievement and what's on the agenda looking forward.

Q.
The improvement in portfolio performance from ten years ago is a great story. How did you achieve it and how has the portfolio changed over time?

A.
The portfolio has changed significantly since 1990. Ten years ago the University's investment focus was on public market domestic equities and bonds. For most of the eighties, our allocation to equities was between 50% and 60%. Today our exposure to equities is 80%. That's a huge difference. Today's portfolio is also highly diversified with strategic allocations to international as well as domestic markets, absolute return funds and alternative assets such as venture capital and private equity investments.

These changes occurred incrementally through a series of policy changes in which the Board of Regents played a key role. For example, our initial foray into alternative assets was a 5% allocation that today is up to 15%. This has been a terrific program with distressed funds providing an equity kicker in the early years and venture capital funds providing huge returns more recently. We were constrained from investing in international markets until our South Africa restriction was lifted in 1992. Even then we opted for a global rather than an international allocation as this flexibility appealed to our Board. Given the strength of the U.S. markets particularly over the past five years, a lesser allocation to international helped our performance. Earlier this year, we finally moved to a "pure" international allocation. Finally, nervousness about the buoyant U.S. markets led us to add absolute return funds - funds that in theory will perform well in all markets - to our structure in 1997.

In summary, our strategic policy targets today are 40% domestic equity, 15% international, 10% absolute return, 15% alternative assets, 15%, domestic bonds and 5% global bonds.

Q.
In the past decade you've grown your total allocation to equities, whereas fixed income has dropped from 30% to 20% of assets. What is the role of fixed income in your portfolio?

A.
That is an excellent question and one we frequently ask ourselves. Does fixed income have a role in an endowed portfolio that is, in effect, invested in perpetuity? The standard answer is to define the role of fixed income as a hedge against deflation, as a source of current income to meet spending needs and as a means of reducing overall portfolio volatility. Of the three roles, I think the latter is the most critical for us. In theory we should be able to weather the bad markets in order to more fully participate in the good markets. In practice, very few boards have the stomach for a 10% or greater drop in the value of their endowment. It makes for very bad press and has the potential to damage the overall investment program not to mention the institution's fund-raising efforts. Public institutions such as the University of Washington are particularly susceptible to public criticism.

Left to Right: Judy P. Wilson - Associate Treasurer, V'Ella Warren - Treasurer,
Douglas W. Breckel - Sr. Associate Treasurer, Susan C. Ball, Sr. Associate Treasurer

Q.
What do you want to accomplish over the next ten years and how will you address the complexity of the portfolio?

A.
Earlier this year, the Treasury Office initiated a strategic planning effort to address that very question. There's an expectation that our portfolio strategies will continue to grow in complexity and this suggests that the knowledge and time demands of staff and governance bodies will likewise expand. We've initiated a series of discussions with a number of public and private universities whose performance over the past 10 years is superior to ours and/or whose governance and staff structures differ from ours. We're hopeful that we will come out of these discussions with ideas that we will be able to share with our Board.

We know that we will need a systems infrastructure far more extensive than what we have currently. We've initiated conversations with our custodian to develop a data warehouse that will support a number of information and reporting needs. Over time we hope to consolidate processes and communicate with our customers in ways far more flexible and responsive than currently possible.

We expect that attracting and retaining good staff will remain particularly challenging in our part of the country. Our ability to provide career development opportunities within a higher education context will be critical. Today we would characterize our staff as generalists. In the future, we see the need for greater specialization. Specialization will expand the level of expertise and knowledge on the team and allow us to respond appropriately as the portfolio continues to change over time. Our planning time horizon should allow sufficient time for us to either develop or hire the expertise we ultimately need.

Q.
How does your vision statement fit into this?

A.
Over the past year, the senior leaders within the Treasury Office worked together to define common values. We recognized that we were responsible for creating a work environment attractive to others and to ourselves. We asked questions about what motivated us, how we wanted to be perceived by our customers and how we best worked together. From these discussion we developed a simple vision statement:

"Superior Performance. Exceptional People. Collaborative Partners."

Q.
What will the portfolio look like in ten years?

A.
The current strategic plan includes a ten-year economic forecast where we identify specific trends that will have an impact on our investment strategy. For example, our forecast indicates that inflation will rise, probably triggering a recession. Stock exchanges will become more consolidated, driving efficiencies into non-US markets. Internet strategies will transform some industries. Global companies / strategies will become more important with international markets, at times, outperforming US markets. Volatility in returns will be higher.

Several implications for our investment strategy fall out of this forecast. Diversification rather than concentration is a "safer" strategy as it will be harder to identify a successful concentrated strategy that can dominate over the next decade. We are likely to increase our exposure to non-U.S. markets, alternative assets and absolute return funds as those strategies are more likely to outperform.

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