As Harvard, Yale, Princeton and other elite American universities have seen billions of dollars wiped from the value of their endowment funds during the recession — with losses of up to 30 per cent forcing cutbacks — one private college in New York is bucking the trend.

By adopting a conservative, some might say contrarian, approach to risk, The Cooper Union for the Advancement of Science and Art, in the East Village of Manhattan, has ensured that its $600 million (£370 million) endowment — a minnow compared with Harvard’s $37 billion fund — has had one of the best portfolio returns of any institution in the country.

It achieved an annual return of 21.8 per cent from July 2005 to the end of December 2008 and ended its last fiscal year to June 30, 2008, up nearly 5 per cent. In the first half of this fiscal year it has lost 2.4 per cent, although it expects a flat return for the whole of fiscal 2009.

Compare that with Harvard, where Catherine Drew Gilpin Faust, the president, is predicting a 30 per cent fall in the value of its endowment by the end of this year.

John Michaelson, a partner of Imperium, the American investment house, and head of Cooper Union’s investment committee, is highly critical of the investment models used by many other universities, pension funds and charitable foundations and believes that they could learn from Cooper’s example.

Cooper Union’s endowment suffered huge losses after the dot-com bust and 9/11. From 2005, under the guidance of Mr Michaelson, an Eton and Oxford-educated New Yorker, it embarked upon a new strategy, drastically cutting back its exposure to risk.

Mr Michaelson’s aim was for “no material losses” together with “a constant cashflow to meet expenses”. The 150-year-old institution charges no tuition fees and relies on its endowment to fund up to 70 per cent of its operations (compared, for example, with Harvard, where the endowment funds a third of operations), so a fall in the endowment would have meant cuts in the classrooms.

Mr Michaelson was lucky: the family of Peter Cooper, a 19th-century industrialist, after whom the college is named, had long ago given the college the land on which the Chrysler Building in Manhattan stands and this generates annual revenues of $7 million.

The lease was scheduled to be reset in 2018, but in 2006, when property values were rising, Mr Michaelson negotiated an agreement with Tishman Speyer Properties, a leading real estate company, which locked in rent escalating payments of $32.5 million by 2018, $41 million in 2028 and $55 million in 2038.

“By turning the Chrysler lease payments into a secure and fixed stream, the value of the asset did not just lose its correlation to the markets, but actually became counter-correlated,” Mr Michaelson said.

After the same no-bets strategy, in 2007 Cooper Union insisted on receiving payment in advance and in cash when it leased an old college building to a property developer. At the same time the college raised its cash holdings, keeping a reduced proportion of assets in funds that hedged against stock market declines.

Mr Michaelson, who also sits on the investment committee of Eton, has little patience with endowment managers who believe that their losses are the result of events beyond their control. He said: “The exceptional times are primarily what matter in portfolio strategy — they are what you should be planning for.”

He is particularly critical of the “Yale Model”, which consists of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class, believing that it is too dependent on cheap money and buoyant markets. It has worked well for Yale, but much less so for its imitators.

Mr Michaelson’s experience at Cooper Union will be of enormous interest to Britain’s state-funded universities, which lag behind American institutions in generating their own investment income and reducing their dependence on government subsidies.

Only Oxford and Cambridge come anywhere near the leading American universities in the size and scale of their investment activity, but their endowments are still tiny by comparison.

Before the present crisis, both initiated big fundraising campaigns and hired in-house investment committees to reduce their dependence on state funding. Their timing could not have been worse and both have seen the size of their endowments diminish.

The point has not been lost on Mr Michaelson. One additional benefit of Cooper Union’s returns has been that donations to the college have increased as its endowment has grown, a phenomenon that Yale and Harvard experienced in the boom years. “Donors like to know that their money will be well looked after,” he said.

College coffers

Harvard The value of the university’s endowment was $36.9 billion on June 30, 2008. Harvard Management Company expects its endowment to be 30 per cent down for the year ending June 2009, having fallen by about 22 per cent from July 1 to October 31 2008

Yale The value of the university’s endowment fell an estimated 25 per cent, roughly $6 billion, to about $17 billion, between the end of June and December 2008

Princeton The university is likely to finish the fiscal year ending July 30, 2009 with a 25 per cent decrease in the value of its endowment, which stood at $16.3 billion a year earlier

Oxford The value of the university’s endowment fell by 14 per cent to £592.5 million between July 31, 2007 and October 31, 2008. The bulk of this decline occurred in the final three months. This does not include funds held by individual colleges.

Cambridge The university will say only that its endowment, valued at £906.5 million on July 31, 2008, had registered a “negative” performance over the past year, adding that this was still “ahead of the traditional indices and significantly better than those results indicated by major US university endowments.” This does not include funds held by individual colleges.

Source: Times research

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