Several local universities affected by $128 million loss by Common Fund

July 04, 1995|By David Folkenflik | David Folkenflik,Sun Staff Writer

A Connecticut-based organization that handles more than $20 billion for 1,100 colleges and universities has blamed the loss of $128 million on a reckless investor whose work escaped scrutiny.

In Maryland, the Johns Hopkins University, St. Mary's College, St. John's College and a foundation affiliated with the University of Maryland School of Law have invested millions of dollars in The Common Fund.

Maryland campus officials reached for comment said they were concerned by the revelations and confirmed that they would lose some money, although the exact amounts remain unclear. But they also said the ultimate result would be diminished yields on their investments rather than actual losses.

"This is the sort of thing that you hope never would happen," said Christopher B. Nelson, president of St. John's. Last fall, the Annapolis college began to switch all of the investments in its $25 million endowment to the Common Fund. "If it does happen, you hope it would be as part of a highly diversified portfolio of funds, which is the case."

"We're gravely concerned," said University of Maryland law Professor Garrett Power, secretary of the board of trustees for the Westminster Preservation Trust. But Mr. Power also said he was reassured by a conference call yesterday afternoon in which scores of college and foundation officials heard from Common Fund President David K. Storrs.

The trust helps to maintain Westminster Hall in downtown Baltimore for the law school. Its entire $713,000 endowment is invested with the Common Fund and lost approximately $20,000 from its return this year, which will still provide earnings of about 13 percent.

Some major schools, including Vanderbilt University, the University of Southern California, and the University of Michigan, which maintain far more money in the funds, stand to lose far greater amounts.

Vanderbilt Treasurer William T. Spitz, who serves as vice chairman of the Common Fund's board, called such losses "minuscule," and noted in a statement that his university expected to earn more than 10 percent from the investment of its $900 million endowment. Yet the figures provided by his office indicate a loss from expected returns reaching about $2.5 million.

The University of Michigan stands to earn $1.5 million less than expected, according to the Associated Press. Other major private colleges, including Amherst, Dartmouth and Wellesley, are also clients of the fund.

The Common Fund is a not-for-profit coalition of universities and colleges, generally smaller ones, that pool their endowments to allow for a more broadly based investment strategy than each could accomplish on its own. It is comprised of 35 separate funds. (Earnings of nine of those funds were affected.) More than 100 outside professional investors handle the different accounts, which provide alternative approaches to investments.

The Common Fund, which first opened in 1971, is designed to create significant yields at minimized risks. In general, the strategy has worked. Because of the loss, however, this year's yield for the fund will lag behind that of the Standard & Poor's 500 index, an industry benchmark, according to the Bloomberg News Service.

Late last week, the Common Fund informed its members of the loss and notified federal regulators. Teams of government auditors met yesterday with officials at the First Capital Strategists Inc., in York, Pa., where arbitrage investor Kent Ahrens is said to have admitted ignoring safeguards designed to limit risks with the colleges' money.

Mr. Ahrens could not be reached for comment. A woman who answered the telephone at First Capital yesterday said no one at the company would speak to reporters.

Hopkins spokesman Dennis O'Shea said the university had invested in three of the nine funds affected. He said the drop in how much Hopkins earned from investments represented significantly less than 1 percent of the university's $800 million endowment.

School officials interviewed yesterday said the Fund's reputation was previously unblemished.

In joint statement sent Sunday to member investors, Mr. Storrs and Louis W. Moelchert, board chairman of the Common Fund, said Mr. Ahrens had had not followed the fund's explicit instructions to "hedge" its investments, and thus exposed investors to large losses.

According to the fund's statement, Mr. Ahrens three years ago began to bet large amounts of his clients' money that the value of certain stocks would fall. He did not purchase contracts allowing him to buy back the stock at a later point for a fixed price -- a move that would have limited the risk should they have risen in value. When his assumptions proved dramatically wrong, he invested even more money without hedging, a move that led quickly to increased losses rather than accelerated profits.

The Common Fund's misfortune represents the latest in a series calamitous investment schemes that have unraveled in the past half-year.

In December, Orange County, Calif., declared bankruptcy after its then-treasurer's gamble on declining interest rates cost it $1.5 billion. In February, a centuries-old British investment house, Barings PLC, collapsed from the extraordinary losses incurred by a single trader in its Hong Kong branch. And in March, authorities accused the New Era Philanthropy of Radnor, Pa., of a $100 million scam that robbed some of the nation's most respected educational and cultural institutions of endowment money.

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