Smart money struts its stuff up at Hopkins

March 21, 2004|By JAY HANCOCK

YOU MAY FEEL pretty good about your stock and bond portfolio lately, but here's news: The smart money is not thinking so much about American stocks and bonds these days, and when it is, it's often thinking they'll go down as well as up.

The smart money has instead put big dollars into emerging international markets. The smart money also likes nonpublic stocks and complex hedge funds. The smart money believes megaprofits are still to be had by boarding technology startups at the ground floor. But the smart money is also worried about rising prices and interest rates, and as a result it has sunk tens of millions into oil wells, inflation-protected Treasury notes, real estate and a really hard asset: trees.

How do I know what the smart money is doing? I drove up Charles Street and talked to it. The Johns Hopkins University's $1.9 billion endowment is among the biggest chunks of dough run in this town, and among the best managed. It grew by 20.5 percent last year - a few hundred million extra for the university founded with B&O Railroad stock.

The endowment's normally private managers agreed to speak about their performance and recent substantial shifts into "alternative" investments such as venture capital and hedge funds.

What jumps out first is their bet on inflation, which has been almost nonexistent the past decade. In the past five years, Hopkins has dumped more than $150 million worth of bonds and other fixed-income investments, which had a great run in the 1990s but would do badly if consumer prices rose. Some of the proceeds from those sales went into commodities and other assets that would benefit from an inflation resurrection.

"We're trying to build in a hedge against inflation because I think you have to believe the risk is on the upside," says William E. Snow Jr., the economist who has been Hopkins' treasurer since 1989.

In one form or another, Hopkins is aiming to put at least 10 percent of its endowment in inflation-loving assets such as timber. The university has become part-owner of pine and spruce stands in Washington and Oregon and hardwoods in the Appalachians.

About 2 percent of the endowment - nearly $40 million - will be aimed at timber. The idea is that if consumer prices rise, so will the cost of lumber and other commodities, giving Hopkins a capital gain on its trees in the ground as well as income from periodic harvesting.

Hopkins also is buying interests in office buildings, apartments and oil partnerships - more inflation bets. And it has put about $95 million into inflation-protected Treasury securities, which pay regular interest and also increase their face value by the same proportion as consumer prices.

At the same time, Hopkins has sunk hundreds of millions into other nontraditional investments such as emerging markets, venture-capital partnerships, private-stock funds and hedge funds - another marked change from the 1990s.

Besides producing higher potential returns, the moves should reduce volatility in Hopkins' portfolio, Snow said, because many of the new investments typically rise when U.S. public markets fall and vice versa. And as a whole, Hopkins' investments are still less risky than those of some peers.

Fully half of Harvard's and Yale's multibillion-dollar endowments, for example, are in alternative assets, said John Griswold, executive director of the Commonfund Institute, a Wilton, Conn., nonprofit that studies university investments.

In many endowments, "what you're seeing is a great rush toward alternatives, many of which are hedge funds," which often employ futures, options or other derivatives to seize on market movements, Griswold said. "You're also seeing real estate and nontraditional debt, like distressed debt or high yields."

Harvard and Yale pioneered alternative plays for higher-education savings in the early 1990s, and they reaped enormous gains from the venture-capital and stock booms of the past decade.

Hopkins took a more conservative approach, partly because of university operating losses in the 1980s and partly because its endowment, while huge, was still far smaller than those of some Ivy rivals, said James T. McGill, the university's senior vice president for finance.

While it trailed more aggressive peers some years, it limited losses when stocks plummeted, falling 1 percent in 2001 and 6 percent in 2002, Snow said. The average annual return over the last decade was 9.3 percent, and Hopkins has consistently beat benchmarks for its chosen asset classes. It wasn't until the endowment hit $1.5 billion in 1999 that Hopkins trustees felt comfortable with riskier bets. It wasn't until 2000 that they substantially altered their guidelines. And they're still implementing the changes.

While the university moved substantially into emerging-market stocks years ago (4.5 percent of current investments, nearly one-third of its international stocks), it's less than halfway toward its target of having 12 percent in venture and buyout funds, timber and real estate. Hedge funds equal 13.4 percent - less than the 15 percent guideline.And although it still has 46 percent in U.S. stocks - substantial compared with the positions of other universities - that proportion could shrink below 40 percent as Hopkins' money-jockeys move into alternatives.

Maybe they'll be right. Maybe they'll be wrong. But they know a heck of a lot more than you and I.

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