I posted earlier about how the financial administrators at The University of Western Ontario mismanaged funds by treating the high returns of the past as something normal, to be expected every year, and did not adequately provide for the contingency that markets might turn downward.
They weren't the only ones.
The University of Toronto lost $1.3 billion.
The news comes at a time when campuses across the country are cutting
budgets, in part because of investment losses. The University of
Toronto, which boasts the country's largest endowment fund, also is
shaping up to become a casualty on this front. At the University of
British Columbia and McGill University, home to the second- and
third-largest endowment funds in the country, leaders have said losses
are running about 20 per cent. U of T's losses also are greater than
the benchmark for large Canadian pension funds, which suffered an
average decline of more than 18 per cent in 2008.
The justification from their fin-admins:
Your article U Of T Reports $1.3-Billion Loss On Investments (April 1)
deals with a one-year period. Prudent investors take a long-run view.
Our interest in long-term growth led U of T in 2000 to break with the
usual Canadian model for managing endowment and pension funds because
their overexposure to bonds could not ensure enough gains when markets
were strong to outpace inevitable losses when markets deteriorate. As
markets weakened, U of T anticipated the short-term drop and
communicated four months ago we expected to withhold payments from our
endowment this year. We also expect to resume payouts next year.
Translation: We gambled with the rent money and can't pay the rent this year, but we hope we can pay the rent next year. You'll have to do without in the meantime, but we're certainly not taking any personal responsibility for the losses.
Not Just in Canada
Of course a shining example of the problem comes from Harvard University [h/t to MA]. The details are amazing and even appalling.
For a long while, Harvard's daring investment style was the envy of the
endowment world. It made light bets in plain old stocks and bonds and
went hell-for-leather into exotic and illiquid holdings: commodities,
timberland, hedge funds, emerging-market equities and private equity
partnerships. The risky strategy paid off with market-beating results
as long as the market was going up. But risk brings pain in a market
crash. Although the full extent of the damage won't be known until
Harvard releases the endowment numbers for June 30, 2009, the
university is already working on the assumption that the portfolio will
be down 30%, or $11 billion.
It turns out Harvard had considerable advance warning, too.
Followup: it turns out that the specific problems facing the UWO economics department are due to more than just financial mismanagement at the university. More on this soon.
