Friday, December 19, 2008

Treat Duke’s “19% endowment loss” as a factoid; and be wary

The Free dictionary defines factoid as “a piece of unverified or inaccurate information that is presented in the press as factual, often as part of a publicity effort, and that is then accepted as true because of frequent repetition:”

Today’ Raleigh News & Observer headlines a story:

Duke's endowment shrinks 19%
Today’s Durham Herald Sun reports:
The value of Duke University's endowment funds has plummeted 19 percent amid the global market downturn.
And just 2 days ago Duke’s President Richard H. Brodhead said in an email to faculty and staff:
As of early December, the market value of the endowment was approximately 19 percent lower than it was on July 1.
I encourage everyone to be skeptical of repeated statements of a “19% endowment loss” at Duke.

For one thing, Brodhead was somewhat vague in his statement.

“Early December” is when? The first, fifth, tenth?

Brodhead also labels the 19% an
approximate figure, which he’s very right to do.

Given that a lot of Duke’s endowment has been in hedge funds and other investments that are difficult to value, treat the “19%” as a factoid.

And be wary of news stories like those linked to here in the N&O and H-S that quote Duke people putting a positive spin on Duke’s current financial situation without also including in their stories comments such as those made by Ed Rickards in his JinC column What Duke's endowment loss means and this comment on a post thread here:
I suspect that the 19 % loss may be an understatement since, like Harvard/Yale, a significant portion of Duke's assets are in exotic/illiquid type investments ( private equity, real estate, hedge funds )which may have been particularly hard hit and whose values are not always readily available. And the fiscal year is not even half over, with the real prospect of additional losses between now and 6/30/09.

As I commented in a previous post, Duke's investment losses go well beyond losses on its endowment ( $ 6.1 billion as of 6/30/08. ) Duke/DUHS had an additional $ 3.7 billion of investment assets ( including $ 1.3 billion in its pension plan )as of 6/30/08. Applying Duke's estimated 19 % to the total assets ( $ 9.8 billion ) results in losses of nearly $ 2 billion -- and I believe this is a low estimate.
The entire N&O story's here; the H-S story's here.


Anonymous said...

Given Duke's aggressive ( high risk/high reward )investments, I expect that Duke's losses for its fiscal year ending 6/30/09 will be much closer to Harvard's estimated losses ( 30 % ). Applying 30% to Duke's invested assets of $ 9.8 billion results in estimated losses of nearly $ 3 billion for the year ending 6/30/09. This is obviously much more significant than the $ 1.2 billion in estimated endowment losses that Duke has communicated , and which has been reported in the Chronicle and local newspapers. It seems that Duke may be being too optimistic ( dishonest ? ) in its communications.

In addition, it's also likely that the recessionary economy could result in a significant reduction in philanthropic contributions to Duke from alumni, parents, associations, corporations etc.( $386 million in the year ended 6/30/08.)

Considering the above, Duke's fiscal 2009 financial results could be pretty bad.


Anonymous said...

"19%" seems a little odd to be using as "an approximate figure". Wouldn't most of us round up and say, "20%"?

(Unless we are trying to hide really bad news by making it seem not quite so bad...?)

Anonymous said...

Note 7 to Duke's consolidated financial statements as of 6/30/08 provides a breakdown by type of investment of Duke's $ 8.5 billion of investment assets . ( There is an additional $ 1.3 billion in Duke's defined benefit pension plan which is similarly invested . ) I've summarized below the approximate allocation percentages by type of investment.

* hedged strategies -- 42 %
* private equity -- 23
* foreign stocks -- 16
* domestic stocks -- 5
* real estate -- 9
* other -- 5

Duke's portfolio is heavily weighted ( 95% ) to the more exotic ( and illiquid ) types of investments and equities ; it includes very little of the " less risky " investments, e.g. U.S.Treasuries. This allocation has resulted in very favorable investment performance for Duke , Harvard , Yale etc.over recent years, except for this year. Apparently, this aggressive ( high risk/high reward ) investment approach has been particularly hard hit during the current economic crisis .