Thursday, December 18, 2008

What Duke’s endowment loss means

Ed Rickards (T ’63 and Law ’66) is an attorney and former Chronicle editor.

Just days ago, at the end of its December meeting, Duke’s Board of Trustees failed refused to release actual, current numbers about its investments.

Last evening Duke reversed course (I wonder why). President Richard H. Brodhead acknowledged a 19 percent loss in the value of the endowment, a total of $1.2 billion gone poof.

issued the statement himself. Trustee chair Bob "Wachovia" Steel was no where to be found.

Brodhead could have included in his statement – an email address to faculty and staff - the words "lost so far."

Like Harvard, whose president recently explained its giant holdings in hedge funds and private equity still have to be re-evaluated, Duke has focused its holdings in these turbulent areas.

In fact, Duke has focused more in these areas than Harvard. As of July 1 Duke had 42 percent of its money in hedge fund; and 23 percent of its money in private equity.

There is no ready market for these: the Wall Street term is how these investments are "marked" -- that is -- how you estimate their value. These estimates can vary widely.

Harvard’s President Drew G. Faust correctly warned that its numbers will be adjusted downward when all the dust settles; President Brodhead did not

In November, Barrons, the weekly magazine of the Wall Street Journal, estimated that such holdings in university endowments have already lost half their value. If that's true for Duke, its reported loss of
$1.2 billion will prove to be $2.5 billion.

In his only formal statement before tonight, Brodhead reassured us that Duke was "stable and secure" with a "strong financial foundation." A sunny island in the tempest. That was misleading to say the least.

Let's look at what $1.2 billion -- the acknowledged loss in the endowment -- means so far to Duke:

-- In recent years, Duke has gotten contributions of about $125 million per year for new endowment. That means a whole decade of giving is wiped out.

-- It took Brodhead one "quiet" year and three years in public to eke out $300 million for the Financial Aid Initiative. This wipes out this gain -- and four others just like it.

-- When the full impact of the loss is felt, Duke will have $60 million less to spend in its annual budget. The highly touted increase in this year's financial aid budget amounted to only $11 million.

In the past 24 hours, there was one other set of numbers with ominous implications for Duke. Sixty-six percent of the young people who were given early admission to the class of 2013 said they needed financial aid.

Statistics for the class of 2012 were not released a year ago, but in the two years before that, only half as many -- around 32 percent -- said they’d need financial aid.

It's clear Duke's budget will not only have less money to spread around, but its highest priority -- need based undergraduate aid -- will be crying for more.

Tonight's statement by Brodhead touched only Duke's endowment. Duke Management Company invests all of the university's funds, huge amounts of money.

-- There will be similar losses in the two Duke Pension plans; perhaps driving their value to the point where Duke will have to increase contributions from its annual budget to keep them fully funded.

-- There will be similar losses in the cash account. For example, money that parents paid last summer for tuition for the fall semester just ending was in the same pool -- where at least 19 percent has been lost.

There is much more that needs to be said in the interests of informing the Duke community.

But for now, I’ll just end with this: What I missed most in President Brodead’s statement was any sense that the financial plight of Duke is a responsibility and burden for all of its. There was no invitation for ideas to save money, no suggestion there be a dialogue to adjust priorities.

Brodhead's statement is consistent with his way of operating -- to deny information to students, faculty and alumni so that their effective participation in university governance is emasculated.


Anonymous said...

And another jolt to the Blue Devil pocketbook will be Duke's settlement with the rest of the lacrosse players and Mike Pressler (again), and they continue to spend millions of dollars on legal fees.

Anonymous said...

Is there a conflict of interest when Bob Steel and Richard Brodhead are both being sued individually, and yet as BOT members they also help direct the response of Duke to the suits?

Are they open to charges that they are putting their own best interests ahead of Duke's?

Anonymous said...

I think it is important to dinstinguish between several parts of this story. I can see at least three:

1) Assets have done poorly. I think it is unreasonable to expect a large fund such as this to be completely insulated from the economy. As such, something in the neighborhood of a 30 to 40% loss should be expected. Over the long term (and these funds should be invested for the long term), investing in risk free assets will cost the endowment far more than it would lose in an event like the current one. So, while we are all stunned by the large losses, investment performance that is similar to all the other large foundations is hardly something to take the managers to task about. Remember, when you are very large, you are the market.

2) A significant amount of the assets may have been put in very risky hedge funds leading to losses far in excess of Duke's comparables. This could be a big problem and is something the those responsible should be held strictly accountable for (namely, they should be fired and possibly sued).

3) It appears the board is not being forthcoming about the situation. While this issue could change based on facts that are released later, it is very troubling when many obvious questions appear to be intentionally left unanswered.

Anonymous said...

Maybe this episode of creative truth telling will finally wake up the BOT to see Brodhead's true character and do something about it.

Anonymous said...

Regarding Duke's apparently aggressive( high risk/high reward) investment strategy, I wonder how much influence trustees Bob Steel, John Mack and Alan Schwartz had. They were/are CEO's of prominent financial institutions ( Wachovia,Morgan Stanley, Bear Stearns )that collapsed ( or nearly collapsed )as a result of an investment strategy that included an irresponsibly high level of risk.


Anonymous said...

Regarding the last comment: the Duke University Endowment, Duke Endowment, and Duke's pension funds are all managed by DUMAC, LLC. This is a thinly veiled investment firm comprised of mostly Duke higher ups including Triplett (ties to Wachovia), Zelter (ties to Goldman, Sachs and CitiGroup), and of course Brodhead and Trask III. List of managers and directors can be found here:

I appreciate the comment from Ed Rickards, it may be that even his possible estimate of an actual 2.5 billion loss is on the optimistic side. I can't wait to see the numbers when the dust settles. It will be hard (and is hard) for Brodhead to blame the investment firm for this because of its close ties to Duke. I guess suing DUMAC, LLC also amounts to Duke suing itself for a poor investment strategy. What a mess.

It is no surprise that Duke is not being upfront with the details.

Anonymous said...

If the percentage of students that needed financial aid nearly doubled, does that mean that there was a decision to replace middle class kids with needy kids, or did middle class kids with good scores etc stop applying?