As CIO at Penn, Gilbertson works with a subcommittee of Penn trustees headed by Howard Marks W’67, chair of Oaktree Capital Management, to develop the office’s “strategic asset allocation,” which defines in broad terms how the University’s resources ought to be distributed among different investment classes. They also look for opportunities that merit deviating from those targets—what Gilbertson calls a “tactical asset allocation.” For example, the University was “overweight” in international equities in FY2005. Those investments, particularly in Japan, performed exceptionally well, helping bolster returns. With those decisions made, the final step is manager selection—“finding smart people to be invested with,” she says.

Endowment funds, which are seen as long-term investors—“smart money”—are generally valued over private investors or other institutional investors such as pension funds. In Penn’s case, there is also the advantage of the University’s extensive alumni network in the financial world. “Some of these investment vehicles are very small-market, and there are a couple of phenomenal investors that everyone wants to be invested with,” she explains. “They can only let so much money in the door and being Penn really helps in these circumstances.”

Since arriving at Penn, Gilbertson has been developing a staff with expertise in key market areas such as real estate and natural resources, private equities, hedge funds, public equities and fixed-income, and emerging markets. “Endowment performance is critical to the financial health of the University and to its academic programs, and because of that more and more universities are setting up endowments and managing them professionally,” she says. “This turnover in the endowment world has given me the opportunity to approach a couple of great people and bring them to Penn.

“I can come up with two or three or four great investment ideas a year. But you need a team of people doing that,” she adds. “And I think that we’re really getting some great people here to help on that.”

Gilbertson estimates that it will take three to five years to build up Penn’s portfolio in alternative asset categories like private equity, real estate, and natural resources. Rushing that process “would be an enormous mistake,” she says. “Evaluations are very challenging right now across all asset classes. There ain’t a whole lot up there that’s cheap.”

Simply matching Stanford’s or another high-performing endowment’s investment in real estate, for instance, would “be insanity because we’d be paying top dollar for those assets,” she says. “Best to wait for a little distress and we’ll get our opportunity.”

Looked at over the past five years, she says, Penn’s measured approach to remaking its portfolio paid off. Over five years, the endowment had an annualized return of 7 percent; the three-year return was 9.9 percent. The five-year return puts Penn among the top 10 performers among endowments over $1 billion.

“Penn looked bad in 1999 and 2000 because we had this enormous value tilt in U.S. equities, but we hung in to that value tilt when it was very painful, very difficult, and that was why Penn outperformed in 2001 and 2002,” she says. The University had positive returns in June 2001, “when the tech bubble was really starting to burst,” and in June 2002, “the summer when the S&P hit its low point,” when many other endowments saw negative returns (-3.6% in 2001 and -6% in 2002, on average).

While the University’s portfolio will look more like its peers, that’s for the sake of diversification—doing a better job of spreading the risk—and not to chase past returns. “We don’t today have the buyout portfolio that Stanford does or that Yale does. But we will be there. We’re gearing up to get that,” Gilbertson says. “But quite honestly, are buyouts or real estate really going to be the engine that drives performance in fiscal year 2007? I don’t think so.” While the lack of private-equity investments hurt Penn last year, “there are going to be years and years to come where people are going to pay for having a lot of private equity,” she adds. “You want to have different bets working for you. You need to have a couple of balls in the air.”


A Positive Trajectory

As the University passed the half-way point in the current fiscal year, the three administrators were looking forward with, well, “bright anticipation.”

“We’re doing very well. I think we’re on a very positive trajectory,” says Zeller. “People are focused on what the institution’s needs are, and I think, in preparation for the public launching of this campaign, we’re beginning to see a lot of resonance with it and people are starting to support it.”

Through the end of December 2005, giving totals were on a pace to exceed last fiscal year’s performance. At $228,443,676, gifts and pledges were ahead of last year’s results at the half-year mark by about $12 million; while cash receipts were up by about $32 million at $234,772,455.

Gilbertson is still “pinch hitting” on public equities and fixed income, but otherwise her management team is fully staffed. Led by strong international returns, results for the calendar year 2005 were trending positively. More important for the long term, though, “We’re planting seeds for the future,” she says. “We are finding select opportunities,” she adds, referring—obliquely—to Japanese equities and German real estate. “There are some other things out there that are cheap—and I’m not going to tell you what they are.”

After declaring himself “bullish,” Carnaroli takes a prudent step back, noting various causes for caution and concern: “Energy costs are hitting us hard, and security costs, and we’re seeing people feel the pinch in the strains of the economy—some of the inflationary pressures—that we are going to have to address in a proactive way.”

Still, he says, he sees “a lot of good things coming.”

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FEATURE: Whence the Money
By John Prendergast

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