Questionable investments in now bankrupt Lehman Brothers, Wachovia and Washington Mutual has some reconsidering investment managment strategy
Trent has lost millions of dollars out of its four investment fundssince December 2007, documents obtained by Arthur show, and may bereconsidering its relationship with one of its two investment managers.The value of the university’s pension fund fell from $203.5 million in2007 to $163.8 million in December 2008, and the endowment fund sankfrom $31.4 million to $25.6 million over the same period. Currently,Brandes Investment Partners and Phillips, Hager & North are thefirms responsible for investing these university funds.
Questionable investments in now bankrupt Lehman Brothers, Wachovia and Washington Mutual has some reconsidering investment managment strategy
Trent has lost millions of dollars out of its four investment funds since December 2007, documents obtained by Arthur show, and may be reconsidering its relationship with one of its two investment managers. The value of the university’s pension fund fell from $203.5 million in 2007 to $163.8 million in December 2008, and the endowment fund sank from $31.4 million to $25.6 million over the same period. Currently, Brandes Investment Partners and Phillips, Hager & North are the firms responsible for investing these university funds.
In an interview with Arthur, Trent Vice- President, Administration Don O’Leary emphasized that although some companies Trent had investments in have gone bankrupt over the past year, not all of the value lost from the funds is “lost,” in the sense of having disappeared completely. He said there is hope that the stocks and other equities the university holds will regain much of their value. In addition, O’Leary confirmed that Trent’s Investment & Audit Committee has agreed, at least for 2009, not to cut back on any of the services paid for by these funds.
The various investment funds are not part of Trent’s operating budget. Instead, the return made on stocks, bonds, and other investments pays for scholarships, bursaries, staff and faculty pensions, and other activities. Because the amount of money used to fund these activities comes out of profits from the previous four years, years with higher than average returns have helped compensate for sudden declines like 2008’s.
Nevertheless, the decline has been staggering. Much of it is due to investments Trent made in financial firms like Lehman Brothers, Wachovia, and Washington Mutual that went bankrupt last fall as the US subprime mortgage market collapsed, and complicated financial products based on their value imploded. The global recession has also brought down the value of many of the companies Trent currently holds stocks in, like GM and Nortel.
Troubled banking and insurance corporations Bank of America, Citigroup, and AIG are also on the list – all of which have received multibillion-dollar injections from the American government to keep them from dragging down the global economy.
O’Leary said many of the now-bankrupt companies, like Lehman Brothers, seemed very safe until their demise was imminent. A representative from consulting firm Hewitt Associates regularly advises the Investment & Audit committee, he added, and while some concerns were raised by that consultant and board members about the health of these firms, events unfolded too quickly to respond to.
“You can’t react to that kind of stuff,” O’Leary said. “When you’re part of a pool, you’re relying on the experience and knowledge of the investment managers. Yes, there were some concerns raised, and the [investment] companies made some adjustments, but they also thought, ‘We’ve met with individuals and representatives from those companies and we feel comfortable about it.’”
“You make a bet sometimes.”
Most investors also rely on credit-rating agencies to assess the safety of financial investments, and publicly available Trent investment policy documents show the university relies on ratings given by four well-known agencies, including Standard & Poor’s and Moody’s. In June 2008, the Board of Governors approved changes to the university’s investment policies, requiring higher rating standards to be met. A number of rating agencies have since been accused of knowingly underestimating the riskiness of mortgage-backed securities and other financial products based on their value, called derivatives, like collateralized debt obligations (CDOs).
US Congressional Oversight Committee investigations into these and problems of conflict of interest at credit rating agencies have made reforming these institutions a priority for US President Obama’s efforts to get credit flowing again and restart the global economy.
Trent remains invested in mortgage-backed securities and some derivatives at present. O’Leary defended the choices, saying, “This is a very lucrative type of investment activity. We didn’t want to get out of that. But we did put some restrictions on it.”
Other universities in Canada and the US with large portions of their endowment and pension funds invested in markets have also suffered big losses over the past year. Harvard University’s endowment fund - the largest of its kind with a value of $37 billion in June of last year - estimated losses of 22% over the fall, with more expected this year. According to a Maclean’s report, Canadian universities on average invest more than half of their endowment funds in global markets, which have yet to begin seriously recovering. O’Leary told Arthur that Trent’s proportion of 60% in these markets usually assures a high return on investment for higher risk.
That said, O’Leary conceded that the administration is not pleased with the performance of Phillips, Hager & North or Brandes, and may reconsider the relationship with the latter. Trent began relying on Brandes as an investment firm in 2004, replacing Sceptre Investment Council.
In recent years, many investment firms have begun offering “socially responsible investment” (SRI) funds, targeting investment toward companies with high environmental, labour, and human rights standards. Phillips, Hager & North offers an SRI fund, but Trent does not invest in it. Brandes does not offer an SRI alternative, though Sceptre does. O’Leary said the reason the Investment & Audit Committee has chosen not to invest in this kind of fund is mostly because of the cost, and added they were considering it before the recession began.
“We’ve been reluctant because of the cost to make changes. But the board has reviewed the investment types and companies that the university is invested in, and feel comfortable with those choices. Quite frankly, I admit we were paying more attention it a year ago, a year and a half ago,” O’Leary said. “We were investigating it. We were doing our homework until the market tanked, essentially.”
Budget cuts are on the way for the 2009-10 year, but the drastic decline of Trent’s investment funds will not impact core budgeting. Salary cuts and hiring freezes will force some departments to cut classes next year, but O’Leary confirmed that no departments or programs will be eliminated.
Last Updated on Wednesday, 09 September 2009 10:45
