Tending Clark's Future

The evolution of Clark's endowment and the integral role it plays in the economics of the University

By Barry J. Walker '58

"Clark University couldn't operate without its endowment," according to Trustee Sumner B. (Tony) Tilton, who chairs the Investment Committee of Clark's Board of Trustees.

"There is a wonderful story to share with the Clark family about the dynamic growth of the endowment over the past 20 years," adds Larry Landry '71, M.B.A. '75, current chair of Clark's Board and current Investment Committee member.

Since the mid 1980s, the Clark endowment has grown from approximately $20 million to more than $230 million. Tilton and Landry agree that this growth was generated by two separate but coordinated efforts.

First is the cumulative aggregation of remarkably generous gifts from alumni and other friends and supporters of Clark, which are pooled for investment purposes.

Second is the evolution of a series of investment strategies, overseen and implemented by the Investment Committee, that have strongly impacted the growth of the endowment.

"No matter how sophisticated the investment strategies for the endowment have become," says Landry, "the opportunity to maximize their impact would be far less significant if the steady flow of gifts from alumni and others had not continued and markedly increased over the past 20 years."

As Robert Hurst '66, former investment committee chair, so candidly states, "People are much more attracted to giving to bricks and mortar, but even though you don't physically see the endowment, it's the cornerstone to the financial security of Clark. The endowment is absolutely critical."

According to Landry, total gifts to the endowment in the 1980s were $5.6 million; in the 1990s they increased to $31.7 million; and in the first six years of 2000, on the heels of the Clark 2000 capital campaign, they totaled $35.1 million. The impact of this generosity, to a large extent, enabled the evolutionary investment strategies to flourish. "The larger the amount of the pooled investment fund, the greater the opportunity to participate in investment vehicles which are not available to smaller endowments," Landry says. This is, according to both Landry and Tilton, the nexus of the separate but coordinated efforts of increased giving and ever more sophisticated investing practices.

Economic impact of the endowment

Clark, like other colleges and universities, uses a portion of the total investment return on its endowment to meet certain costs of operating the institution. The balance of the return is reinvested as part of the overall investment pool, so as to grow the endowment and thus be better able to keep pace with inflation.

Tilton explains that Clark currently draws down between 4.5 and 5 percent annually of the endowment value to meet certain of its costs. The actual "spending formula" has been set by the Board of Trustees at 5 percent of the five-year moving average of the endowment's valuation. "In 2005, for example, about $9 million expended for faculty, graduate teaching fellowships and undergraduate scholarships came directly from our efforts of growing and investing the endowment. The existence of this income lessens the burden on Clark's budget and gives the institution significant financial flexibility," he notes.

This $9 million represented 11.8 percent of Clark's 2005 operating budget.

Historically, this endowment drawdown has impacted the economics of Clark as follows:

"Two lessons can be quickly learned from this historical overview," Tilton says. "First, that the annual drawdown is critically important to Clark's mission. And second, that if Clark is to fund future needs, especially for undergraduate scholarships, graduate fellowships and faculty chairs, the endowment must grow so that the drawdown and the percentage of the budget funded by sources other than tuition will substantially increase."

Landry adds that "since Clark's operating budget is so tuition driven, the long-term effect of future endowment growth is greater flexibility for Clark and the construct of a nontuition-driven revenue stream to fund critically important needs."

Tilton echoes this sentiment. "The endowment must grow in order for Clark to continue to build on its reputation as a first-rate research university that offers innovative undergraduate and graduate education. Growth is achieved through additional gifts from alumni and friends and through successful, prudent investment practices."

People and policies behind the endowment's performance

The investment policies then in place reflected the best investment standards of that time. The investment allocation featured 60-65 percent in common stock, generally the so-called "blue chips" and 35-40 percent in fixed-income corporate and government bonds. Of the common stock holdings, half were in so-called "growth equities" and the balance in so-called "value equities," stock in old line companies which paid good dividends. This balance between stocks and bonds and "value" and "growth" served to diversify the portfolio and generate stable returns.

According to Tilton, a committee member for most of that era, Hiatt engaged an investment manager who was aggressive and was able to hunt down the right assets for Clark to own. The real first advance in endowment growth took place under Hiatt's leadership, always with the constraint to manage risk and honor the committee's fiduciary duties to Clark and its donors. But the process of breaking the mold on investment techniques really began under Hiatt, an astute business person whose leadership in many capacities for Clark justifies the esteem and admiration in which he is held by those, like Tilton and Landry, who knew him so well.

"Clark has been able to begin to overcome the restrictions of access to many alternative investment opportunities—opportunities restricted to all but the top money managers from the largest endowments—because of the roles played by several trustees who had vast experience in money management and were conversant with the leading managers and the newest investment vehicles," Landry says. Today, a great many endowments invest in such alternatives, but in the late 1980s and early 1990s, Clark was very much ahead of the curve. Landry himself had that invaluable access to these alternative investments as a result of his leadership roles at Swarthmore College, Southern Methodist University and the John D. & Catherine T. MacArthur Foundation. At each of these institutions, he served as vice president and chief financial/investment officer.

Tony Tilton is the longest serving member of the Investment Committee. "Tony's presence on the committee, since the late 1970s, has enabled him to help direct and oversee the new directions of endowment investment policy," Landry says. "His expertise, so greatly valued by the committee, is another example of why Clark's endowment has gained such high-level access."

Tilton manages his law firm's trust department with over $400 million in assets and serves on investment committees for several other institutions with endowments ranging from $3 million to the $500 million Healthcare Security Trust, for which he chairs the Board. The Healthcare Security Trust is the Commonwealth of Massachusetts Fund created by the national tobacco litigation settlement.

"These multiple endowments with their unique investment opportunities and access to many facets of the investment industry, enable Tony to exercise a great deal of influence on behalf of Clark's endowment," says Landry.

In addition to Hiatt, Landry cites several other investment committee members and chairs who have helped fuel the endowment's growth. "Even though Clark had a relatively small endowment, we've been able to become very sophisticated in our investment practices because of these individuals," Landry notes.

For example, former committee member Marc Lasry '81, founder and managing partner of Avenue Capital Group, introduced distressed debt investing into Clark's investment strategy. Lasry is considered a pioneer of distressed debt investing, a technique in which investors buy deeply discounted debt securities of operationally sound companies that have assumed too much debt and, as a result, become financially distressed and operationally stressed. These purchases provide the opportunity for those companies to restructure their debt and focus on their cash flow and operations, not debt repayment, thus increasing the value of the underlying asset—the company—and generating greater returns.

Former committee chair and current committee member David Strassler, general partner at Weston Associates, and former committee chair Robert Hurst '66, a senior adviser to Crestview Partners and former vice chairman of Goldman Sachs, introduced Clark to hedge funds and private equity vehicles. A hedge fund helps to manage risk because of its lack of correlation with regular equity markets. "Hedge funds," Tilton explains, "anticipate absolute returns in the 8 to 12 percent range largely irrespective of market performance. As with other components of our investment strategy, these work to hold down volatility and generate substantial returns over the longer time periods appropriate for perpetual endowments."

Tilton credits Hurst with plans to restructure the investment allocation standards for the endowment to far more state-of-the-art levels than existed in Hiatt's day. These new allocation standards are annually reviewed by both the committee and the full Board of Trustees but are largely still in use because they accurately reflect best practices and meet Clark's long-term needs and expectations.

Strassler is also the driving force behind Clark's use of value investing as one of its more important techniques. "The theory behind value investing, whose most successful proponent is Warren Buffett, is that in reality, a stock purchase is truly buying part of the business," Strassler explains. "The value of the stock is only as great as the value of the underlying business."

Clark's investment in Berkshire Hathaway, Buffett's investment firm, has returned 15.6 percent per year over the 19 years it has been held by Clark.

Strassler, who spearheaded the raising of $106 million as chair of Clark's most recent capital campaign, says that "endowment for a school like Clark is vitally important. As a small school we're so tuition driven. Income from the endowment provides a meaningful contribution to the budget and helps insulate Clark from the ups and downs of the economy."

Tilton also credits former chairs and investment committee members Michael Freedman '64 and Sherwood "Woody" Small '66 with contributing to the growth of Clark's endowment. Freedman had established—and achieved—the goal of the endowment surpassing $100 million in 1997, which provided a significant boost to the University's educational mission and was an important impetus to the real growth of the endowment.

Landry further acknowledges the impact and influence of former trustee and investment committee member Allen Glick, '60, "whose business expertise and experience as a seasoned, skilled and successful private investor brought a practical, conservative and often contrary view of investing into the mix, always keeping Clark's focus on minimization of risk, even while more esoteric opportunities became available."

Investment allocation and access to new opportunities

"To help achieve this endowment growth, Clark's Investment Committee continues what it believes are best investment practices," Tilton explains.

For example, as a result of the process spearheaded by Hurst, Clark's endowment investments have evolved from the 60-65 percent equities and 35-40 percent fixed-income allocations in the 1970s to the mix of domestic, international, value and growth equities, hedge funds and private equity investments, domestic bonds, high yield bonds, real estate and investments such as timber and oil and gas partnerships, and other creative opportunities consistent with the best investment practices of 2006.

With the objective of further professionalizing its operations, the committee engaged in 1994 an investment consultant who helps formulate the asset allocations, monitors the endowment's performance and risk profile, and reports quarterly to the committee.

As the breadth and scope of investment opportunities have so radically changed since the 1970s, so has the depth of management for all aspects of the endowment.

"From a sole manager in the 1970s, with three or four submanagers at that time, to today's investment consultant monitoring the performance of more than 20 managers of various aspects of the endowment, the investment committee has broadly expanded its reach into more high-potential investments," Tilton says. "And, at the same time, by having such ongoing performance monitoring of these managers, the investment committee is better able to respond quickly to problems and opportunities."

Here, too, Hurst's influence was important, for, as Hurst says, "It was important to think long term when seeking different managers and to go with those who have a thoughtful philosophy about investing and who take risks into account when developing their portfolios." It is no accident that some of Clark's best performing managers have been retained for 10 years or more.

As far reaching as this asset allocation and professionalism are, there is still room for new ideas on possibly even greater levels of participation in alternative investments. "For example," Tilton says, "the private equity markets have recently done particularly well for Clark. These are nonpublicly traded equities and other holdings."

"Access to this market is very limited and has high levels for the minimum requirements for investing. These minimum requirements are often in the $5 to $10 million range. The larger our endowment, the more able we are to invest in such opportunities where the minimum would not be such a high percentage of our overall fund. This is one of the best examples of the benefits of and need for having a larger endowment," he says.

The Clark endowment record

Tilton further reports that in calendar 2005, the benchmark for Clark's overall endowment performance was the Policy Index, which measures the market performance of all the asset classes in which Clark is invested. For 2005, Tilton notes, Clark's endowment returned 15.3 percent compared to the Policy Index return of 8.9 percent. Over 10 years, Clark earned 10.4 percent per year, versus 8.1 percent for the Policy Index.

The combination of the significant changes in the asset allocation strategy, access to new investment opportunities and the careful monitoring of individual fund managers, led by the Investment Committee and University Treasurer, James Collins, have vaulted Clark's endowment returns beyond reasonable expectations and beyond the returns earned by many other colleges and universities. In the most recent (June 30, 2005) survey compiled by the National Association of College and University Business Officers, Clark's investment results were in the 8th percentile for the year, the 18th percentile for the last three years, the 8th percentile for the last five years and the 18th percentile for the last 10 years. These percentiles cover the performances of the endowments of over 600 colleges and universities.

In addition, when compared with the endowments of the 25 colleges and universities with whom the University shares the most overlap in SAT submissions, Clark's endowment performance also ranks well. In fiscal 2005, the University ranked sixth of the 25, 10th over the past three years, fourth over the past five years and fifth over the past 10 years. In addition, Clark's 13.6 percent annual nominal rate of return for 2005 out-performed this same group's median of 11.5 percent. Over the 10-year period, Clark earned 11.1 percent annually, while the group median was 9.5 percent per year.

"We stack up very, very well to other institutions in our peer group, but we still trail many of the $1 billion endowments because they have access to investment opportunities that we, as a smaller fund, do not," Tilton says. "Clearly, access, while still an issue, has become far less significant because of the growth of our endowment and the leadership exercised by so many of our recent Investment Committee chairs and members."

Landry and Tilton both stress that further closing this opportunity gap is a critically important component of future progress for Clark as the University strives to compete ever more successfully with other high-quality institutions. For all of Clark's successes, the University is not yet where it needs to be, and many of the colleges and universities with which Clark competes for faculty and students have endowments, and therefore endowment spending, of at least twice that of Clark's on a per student basis.

The future of Clark's endowment

• From 1985 to 1989, Clark's $20 million endowment provided an average of $1.1 million per year.

• In the decade of the 1990s, as the effects of investment strategy and greater giving took hold, the endowment provided an average of nearly $3 million per year.

• From 2000 to June 30, 2006, as the endowment grew to its present size, the endowment has provided an average of $7.6 million per year.

• The income spending from the endowment in the first seven years of this decade, which totals $53.5 million, is thus more than two-and-a-half times the total value of the endowment in 1985 ($20 million).

This brief economic history is a major part of the story that Landry and Tilton think important to share with the Clark family.

However, there is a clear consensus among those who have led the reformation of the endowment—Strassler, Hurst, Lasry, Glick, Tilton and Landry among so many others—that future growth is a key factor in enabling Clark to remain a flourishing, vibrant and competitive institution.

"In my opinion, the next step for Clark is to roughly double the size of the current endowment to $500 million over the next 10 years, and then double it again to $1 billion over the next 10 years after that," Tilton says. A $1 billion endowment with a drawdown rate of 4.5 to 5 percent means $45 million to $50 million of annual educational spending on faculty, students and programs.

Tilton and Landry stress the importance of endowment support from alumni and friends in attaining these goals.

"The endowment is a unique structure," Landry says. "It's a vehicle through which intergenerational support is provided. Current students and faculty benefit from those who've preceded them."

Strassler adds that the endowment is an important source of scholarships, which help Clark attract the best and brightest students. "It's wonderful when alumni who received scholarships while they were at Clark reach back to give a hand to the next generation, giving others the same help that they themselves received," says Strassler, who also reminds alumni and friends that "Clark is an institution where an individual can make a difference."

With the continuation of sound leadership and investment practices, and with support from alumni and friends, Tilton looks forward to seeing Clark's endowment reach that $1 billion mark over the next 20 years. He takes great pride in seeing how the endowment impacts the vibrant intellectual life of the University.

"Without the endowment, this University wouldn't be this University," he says.

Barry Walker '58 is a freelance writer.

Current Investment Committee members

• Sumner B. (Tony) Tilton, chair - Attorney, Fletcher, Tilton & Whipple
• Todd Wetzel, vice chair - Senior Vice President, Morgan Stanley
• David Chaifetz '65 - Retired Vice President, Secretary and General Counsel of Praxair, Inc.
• Lawrence Hershoff '71 - Senior Vice President, Citizens Leasing Corporation
• Larry Landry '71, M.B.A. '75 - CEO, Westport Advisors
• William Mosakowski '76 - President, Public Consulting Group
• Robert Stevenish - President and CEO, Modell's Sporting Goods
• David Strassler - General Partner, Weston Associates
• Ex officio: John Bassett, President - James Collins, Treasurer

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Clarknews Fall 2006

Tending Clark's Future Border Crossings 'Indifference is not an Option' Investigating Alternatives to Bone Grafts Newsbriefs Alumni News Sports Briefs In Closing In Memoriam Regional Reviews

Larry Landry '71

Tony Tilton

Jacob Hiatt '46

David Strassler

Robert Hurst '66