By Gillian Wee
Sept. 1 (Bloomberg) -- Pacific Investment Management Co., led by former Harvard University fund chief Mohamed El-Erian, is seeking to mimic the strategy of top U.S. endowments while avoiding the cash crunch that hurt their returns last year.
The richest colleges beat market indexes in the decade through June 2008 by loading up on hard-to-sell assets such as private equity and real estate, while cutting stocks and bonds, a style pioneered by Yale University’s David Swensen. Pimco is refining the model to appeal to investors who want more flexibility to sell assets quickly to raise cash, Mark Taborsky, an executive vice president at the firm, said in an interview.
“One of the lessons from 2008 is liquidity matters a lot more than we ever thought it did,” said Taborsky, 43, who previously oversaw external managers at Harvard Management Co., the unit responsible for Harvard University’s endowment. “The strategy we’re developing is likely to be more liquid than more longer-term endowment strategies.”
El-Erian ran the Harvard fund from February 2006 to December 2007, following seven years as an emerging-markets investor at Pimco. Since returning to the Newport Beach, California-based money manager in 2008 as chief executive officer, he has hired Taborsky and Marc Seidner, Harvard’s head of U.S. fixed income, who started last month.
Harvard’s endowment, the largest in the U.S., recorded annual average gains of 14 percent in the decade ended June 30, 2008, beating the 6.5 percent return of U.S. and Canadian universities. Plunging capital markets cut the fund by an estimated 30 percent in the past year to $25.8 billion.
Questioning Harvard, Yale
The Cambridge, Massachusetts, school sold $2.5 billion of bonds in December, cut jobs and postponed building projects as its endowment’s value declined and losses on derivatives used to protect the university against rising interest rates squeezed the school for cash.
As Harvard’s investment chief, El-Erian returned 23 percent in the fiscal year ended June 30, 2007. Beating the 17 percent increase of market benchmarks, it was the fourth-biggest gain posted since the management company was started in 1974.
El-Erian shares the role of chief investment officer with Pimco’s founder, Bill Gross. The 65-year-old Gross said in May that endowments managed by Harvard and Yale may have to cut their investments in hedge funds and other illiquid assets because their risks outweigh the possible rewards.
Liquidity
Taborsky, a product manager at Pimco’s $800 million Global Multi-Asset Fund, said the endowment strategy may appeal to investors “looking for an institutional-quality product that was previously out of reach or a difficult resource.”
Being able to trade in and out of assets more quickly than endowments, which historically viewed cash as a drag on returns, will allow the approach to be more nimble, he said last week in a telephone interview from his Newport Beach office. He declined to say what kind of products may use the investment plan or how much money Pimco may seek to raise from investors.
“Liquidity is a premium and sometimes it’s worth investing in that and sometimes it’s not,” said Taborsky. “One of the lessons from 2008 that is part of asset allocation is being able to stay in the game and take advantage of the opportunities.”
Swensen, Yale’s chief investment officer, is the top-ranked college endowment manager in the 10 years through June 2008. He ramped up returns by trimming stock and bond holdings and buying more real estate, private equity, hedge funds and resources such as timber, a strategy that was copied by schools across the country.
After committing to private equity and real estate, colleges and universities across the U.S. have little choice but to make good on agreements with fund managers to buy more of those assets. Private-equity funds tie up money for as long as 10 years.
Access to Cash
Yale, which delivered average annual returns of 16 percent in the decade through June 2008, estimates its endowment dropped 30 percent for the year ended June 2009 as investment declines cut the fund by 25 percent and the school spent 5 percent. Swensen said in May that his approach to diversification can’t prevent losses during market declines, and the crisis that slashed the Standard & Poor’s 500 Index by 54 percent from the start of 2008 to the nadir on March 9 underscored the importance of maintaining access to cash.
Pimco, the world’s biggest bond-fund manager, oversees more than $840 billion, including the largest U.S. mutual fund, Pimco Total Return Bond Fund. It is owned by Munich-based insurer Allianz SE.
‘New Normal’
Pimco’s endowment strategy coincides with U.S. endowment losses while colleges consider outsourcing investment operations. Perella Weinberg Partners hired Christopher Bittman, former chief investment officer of the University of Colorado Foundation, in July to head a unit that manages money for endowments. David Russ, a former manager of Dartmouth College’s endowment, was hired in June at Credit Suisse Group AG as a chief investment strategist.
A former deputy director of the International Monetary Fund, El-Erian, 51, said in May that investors must reassess how much money they can afford to lose, in a “new normal” characterized by heightened government regulation, slower growth and rising unemployment.
Jane Mendillo, 50, El-Erian’s successor at Harvard, is setting aside cash to increase the fund’s flexibility, breaking with the endowment’s past strategy of being fully invested and borrowing to amplify gains, she said in an interview last month. The endowment didn’t sell all of the $1.5 billion of private- equity stakes it put on the market last year as bids for the holdings weren’t high enough.
Best Managers
The strategy Taborsky is developing will give investors access to “best-in-class” in-house asset managers as well as outside firms, along with Pimco’s “cyclical and secular views of the world,” he said.
“If your only view in terms of asset allocation is very long term, it ignores the concept that you need to remain solvent over the journey,” said Taborsky, who spent five years at Stanford University’s endowment before joining Harvard. “You can’t just see a destination.”
To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;
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