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How Berkeley's Endowment is Managed

by Julia Sommer, Public Affairs
posted December 02, 1998

As the stock market lurched downward this summer and fall -- after two years of spectacular gains -- many college and university endowment funds felt the pinch.

The New York Times reported Sept. 24 that Harvard's $13 billion endowment had dropped 10 percent, or $1.3 billion, since July 1. That percentage drop and more was echoed at campuses nationwide.

The University of California's total endowment assets stand at about $4 billion, with Berkeley's share about $1.3 billion, according to UC Regents treasurer Patty Small. UC's endowment ranks seventh nationally -- after Harvard, University of Texas, Yale, Princeton, Stanford and Emory.

Berkeley's endowment nest egg -- supporting everything from professorships, scholarships, and fellowships to library acquisitions, landscape maintenance, and the study of Formosan aborigines -- is managed partly by the Regents and partly by the UC Berkeley Foundation, a not-for-profit corporation established in 1975 to attract gifts to the campus.

Following the Regents' investment policies, Small manages more than $1 billion of Berkeley's endowment assets, with the Foundation managing the balance -- $276 million as of Sept. 30. Donors can direct their gifts to specific endowment pools.

"We're doing very well," said Small in October. "Our endowment pool declined only 5.8 percent of its value in the third quarter (ending Sept. 30) because of our strict valuation philosophy, which led us to sell over-valued stocks over the past 18 months and redeploy approximately half those proceeds into 30-year U.S. Treasury securities."

The UCB Foundation endowment pool dropped about 8.8 percent in the third quarter, less than many university endowments.

"We don't react to market swings," says Bob Gendron, UCB Foundation treasurer. "We think long term and make changes slowly. Now the market is on an upward trend."

Total return on the Foundation's endowment pool for fiscal year 1997-98 was 12.1 percent, says Gendron. Nine years ago, when he came to Berkeley, the pool was valued at less than $100 million.

UCB Foundation assets are allocated by a volunteer investment committee of about 20 alumni who work in the investment banking industry. They are appointed by the vice chancellor for university relations, who also serves as the foundation's president.

"Luckily we have a lot of alumni who love this campus," says John Cash, interim vice chancellor for university relations. "It's very gratifying to see how much time the investment committee gives."

Chaired by Dave Redo, '61, president of Fremont Investment Advisors in San Francisco, the investment committee meets quarterly to make allocation decisions for new gifts and the endowment pool. The allocation is maintained fairly steadily at 60 percent stocks, 35 percent bonds and 5 percent cash, says Redo.

To avoid any conflict of interest, the committee hires money managers to invest the funds. The Board of Regents is just one of the foundation's 12 money managers.

At the foundation's Nov. 12 quarterly investment committee meeting, no major allocation changes were made.

"The recent decline in the stock market was short-lived," explains Redo. "The foundation endowment pool is a long-term investment portfolio with long-term objectives. Historically, stocks outperform bonds and bonds outperform cash."

There are 866 funds in the foundation pool, each with its own set of directives from the donor.

Once a year, each fund receives 5 percent of its share of the principal, based on a three-year average. The rest of the earnings go back into the endowment pool for long-term growth and to protect it against inflation. This 5 percent "payout rate" is common among universities, according to Andrea Nakagawa, executive director of administration and finance for university relations.

About 3l/2 percent of Berkeley's $1 billion operating budget comes from endowment income, according to Russ Giambelluca, executive director of the campus budget office.


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