The endowment: enhancing quality into the future
Someone with Srini Pulavarti's blue chip credentials and experience in investment management could lead a pension fund, a foundation, an insurance company or an endowment.
He has previously managed Johns Hopkins University's $2 billion endowment and, most recently, Citigroup's $14 billion pension fund.
Last summer, he joined Spider Management Co. as its president to oversee the University's $1.255 billion endowment because he believes "working for an endowment is the most satisfying from the investment perspective. It's the most flexible, the most dynamic and the most interesting, clearly, by far."
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Srini Pulavarti is now managing Richmond's $1.255 billion endowment
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Ranked 41st among college and university endowments by the National Association of College and University Business Officers (NACUBO), Richmond's endowment portfolio is "in fantastic shape," says Pulavarti, successor to Louis Moelchert, who retired after 30 years to focus on his own investment company.
Pulavarti's approach to making changes is to be patient. "You don't ever want to come in and shock the system," he says. He notes some "holes in the portfolio" that his team is addressing. "But we are in the investment business, so sometimes we have to wait for the markets to come to us rather than just going and investing in definite asset classes."
He estimates it will take two to three years to get the portfolio the way he wants it to look, "mainly because we think that some of these markets are so overpriced that it would take that much time for us to get the right opportunity to get into some of these assets that we like."
Meanwhile, the investment manager's goal is to generate an 8-10 percent return year over year, and "our primary objective is capital preservation," says Pulavarti.
The University calculates an annual drawdown, or payout rate, from the endowment that will never be less than 4 percent nor more than 6 percent of a three-year, moving average of the endowment's market value, says Herb Peterson, vice president for business and finance. So, an 8-10 percent rate of return guarantees the payout plus an additional amount to account for inflation. The actual payout at present is about 4.25 percent, says Peterson.
"You don't want to use the market value at any one date because the value could be unusually high or low," explains Peterson. A three-year, moving average provides a "smoothing factor" to avoid fluctuations in market value.
Richmond's endowment is actually made up of approximately 1,200 individual endowments-many of them scholarships or other restricted funds-that by agreement with donors are preserved in perpetuity. Only the income from these funds can be spent, and that income can only be spent on the specific objectives set out by the donors.
According to President Bill Cooper, "The endowment is the University's permanent capital base that in the short term, helps support our annual operations and in the long term ensures our ability to continuously enhance our quality."
If, for instance, "the University withdrew $20 million from the endowment and used it for a construction project, annual endowment income would decrease by approximately $1 million per year immediately and the decrease would increase each year thereafter," explains Peterson.
So, the endowment does not fund construction projects on campus, says Peterson. If donors have not fully funded a particular building project, the University takes advantage of its Aa1 credit rating from Moody's Investor Services to borrow the funds needed to complete construction. Richmond can borrow money at a much lower rate than it expects to earn on its endowment.
The endowment should be "generation neutral," says Peterson. In other words, if a donor gives a sum of money today that will generate income to cover the full cost of tuition, "our investment and spending policies are designed to assure that that fund will continue to pay the full cost of tuition 10, 20 and 50 years from now."
Currently, endowment income underwrites $45 million, or about 25 percent, of the University's operating budget of $158 million, says Peterson. This is equivalent to providing a "scholarship" of approximately $12,500 for every full-time student.
Cooper says that coupled with tuition revenue, a growing endowment will "help the University meet the objectives of its 10-year strategic plan and beyond," including lowering the student/faculty ratio by hiring additional, new faculty members; increasing the total amount of merit-based financial aid; and continuing the distinctive need-blind admission and financial aid policy that meets 100 percent of eligible undergraduate students' demonstrated financial need through a combination of grants, loans and work study.
An endowment of $1.255 billion puts Richmond in the company of some of the nation's finest colleges and universities. Nevertheless, Richmond ranks behind such institutions as Princeton ($9.9 billion), Duke ($3.3 billion), Vanderbilt ($2.2 billion) and Johns Hopkins ($2 billion).
Other institutions outrank the University in terms of endowment per full-time, undergraduate student. Richmond's $369,422 of endowment per student ranks lower than Dartmouth ($607,649), Princeton ($2.1 million) and Rice ($1.16 million), for instance.
To reach those levels, Pulavarti and his team of money managers will take a strategic approach.
"Our objective and mission are very clear," he says. "We are investing for the long-term investment horizon. We understand what the annual payout is, so that helps us structure the endowment to invest it the right way."
Endowment Asset Allocation |
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Absolute return hedge funds (A) | 20% |
Long-short equity funds (L) | 20% |
Private equity and venture capital (P) | 20% |
International stocks (I) | 12% |
U.S. stocks (U) | 15% |
Real estate (R) | 5% |
Miscellaneous (M) | 8% |
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