The end of February and the month of March was a bad period if you were an employee looking at your 401K or a student with a few hundred bucks in your Robinhood portfolio. But for some institutional fund managers, like those who help to manage a portion of the University of Oregon’s investments in the stock market, it presented an opportunity: Buy.
“…[Our managers] are redeploying cash that was uninvested into what their analysis suggests are good values today given market declines,” said Jay Namyet, the CIO of the University of Oregon Foundation, the non-profit that manages a portion of the university’s investments.
In March, the 11-year economic expansion ended. Largely fueled by share buybacks, the post-global financial crisis stock rally ended not because of a subprime mortgage crisis, a trade war with China or overvalued tech companies. It ended instead because of a microscopic virus that closed countless restaurants, grounded thousands of flights and led to tens of millions of Americans having to follow stay-at-home orders from their state authorities.
Overnight, some small businesses ceased to exist.
While markets have made up some of their losses, small businesses are still struggling and there is a disconnect between the stock market and the real economy. In a time of uncertainty, the Emerald looked into how the University of Oregon’s investments are performing and are being reallocated.
University investment structure and terminology
The university’s investments are divided into three tiers, which are ranked in reflections of safety, liquidity, or how the university can meet its financial obligations, and return.
Each tier is composed of different assets and is managed by a different party. The UO’s first tier, for example, is composed of assets like short-term corporate debt called commercial paper, which companies issue to help cover costs like payroll. Ownership of some assets, like collateralized debt obligations, are forbidden by the university’s investment policy. CDOs, which are composed of pools of debt instruments like mortgages, were one of the sources of the global financial crisis.
The Tier 1 portfolio – Playing it safe
The UO’s first tier of investments is composed of assets, including U.S. Treasury Bills and “prime quality” commercial paper (that short-term debt that companies issue), meaning that it has a high quality credit rating from one of the nationally recognized companies like Moody’s Investors Service and S&P Global Ratings that can rate a company’s credit quality.
Jeff Schumacher, the UO Treasurer, said that this portfolio consists of bank checking balances from the university. To gain a little extra return on investments, Schumacher said at March’s Board of Trustees meeting that the university “began sweeping its checking account balances into overnight investments to earn additional interest” through investing in commercial paper.
The UO has engaged two asset management companies, PFM Asset Management and Wells Capital Management, to manage a short-duration, fixed-income portfolio, Schumacher said.
Falling Treasury yields – what does it mean?
There is a traditional relationship between stocks and bonds that goes something like this: When there is a massive stock market sell-off, investors rush to purchase US Treasuries, which drives down the yield on those investments, or the interest rate the government pays an investor. But if yields are going down, the prices for the assets themselves are going up.
In March, yields on the 10-year Treasury note fell to historic lows, meaning that many investors were seeking security in the form of the U.S. government’s guarantee.
“The short term impact of falling rates on the portfolio is favorable because declining rates increase the value of existing holdings. If very low interest rates persist, it would begin impacting interest income as the portfolio rolls over. While this is not ideal, rates have been historically low for many years and we are not reliant on investment income in managing the university’s finances,” Schumacher said in response to the Emerald’s questions.
“Our overall investment philosophy is focused on long-term investment strategies. As such, we do not attempt to time the market or react to short term market trends. Given this approach, we understand there will be times the market is not in our favor,” he said in an email.
The Tier 2 portfolio – taking a few more risks
The second tier of the university’s investments seeks slightly higher returns with a little more risk. Any of the aforementioned Tier 1 investments are permitted in the Tier 2 portfolio. Other holdings that can be included include bonds notes and other debt instruments from U.S. government agencies and high quality asset-backed securities, such as those which derive their values from mortgages. However, asset-backed securities must have a high rating from S&P and Moody’s.
High quality corporate and municipal debt is also permitted under the guidelines, but the fund can also hold lower-rated investment grade bonds so long as they do not exceed 20% of the portfolio.
The Oregon State Treasury’s Short Term Fund is used for the “vast majority” of the university’s Tier 2 investments, Schumacher said in a statement.
In March, 40.3% of the Oregon Short Term Fund was composed of corporate securities, which was lower than the fund’s historical average of just over 46%.
“Given that the risk premium has widened/increased during the past two weeks, the fund may look to prudently add to this allocation, whether via currently held bonds or potential new issuers, while keeping the three objectives and other policy guidelines at the forefront of final decisions,” a spokesperson for the Oregon Treasury wrote in March.
As of May 5, the portfolio is composed of 43% corporate securities.
The Tier 3 portfolio – stock market exposure
Here’s where things get interesting and the university’s investments have exposure to the stock markets: the Tier 3 portfolio. This portfolio is managed by the University of Oregon Foundation, a non-profit entity that supports the UO. As of the end of February, before the bottom of the market selloff, the value of this portfolio was $77.5 million.
That money is UO’s, but it’s held in accounts that the Foundation manages.
The funds in this portfolio are “unnecessary for [UO’s] current needs and so available for riskier, long-term investments to earn a higher rate of return,” according to documents provided to the UO’s board of trustees. The objective of these funds is “to try to generate at least a 4% real net return over five-year periods using a prudent level of risk.”
“There are some University assets that we invest on their behalf because we’re just better at it,” Paul Weinhold, the Foundation’s CEO said in a November 2019 interview with the Emerald. “So I think we’ve got long-term reserve accounts that we invest with the university, we invest it outside of the endowment with for, you know, for their specific investment purposes, but it’s their money, they get it anytime.”
From that point, the Foundation has managers that specialize in stock and fixed-income management who oversee various portions of the portfolio.
“This portfolio is meant to take a long-term perspective and not one in which we try to time getting in or out of certain markets,” Namyet, the Foundation’s CIO, said.
The UO sets parameters for how the fund can be allocated. The target distribution for the fund is 70% equities (or stocks) and 30% fixed income (instruments such as bonds). At the time of the most recent public update at March’s board of trustees meeting, the fund was 72% equities and 28% fixed income. In a March update to the board of trustees, University of Oregon CFO Jamie Moffitt presented an update from the Foundation that said the portfolio was down 2% compared to an 8% decline in the S&P 500, which tracks the performance of the 500 largest companies in the United States. In simpler terms: The portfolio did not lose as much as one measure of the stock market.
While the government has been able to get checks out to Americans and the stock market has made up some of its losses, some portfolio managers are still concerned.
“Managers are deeply concerned with how long this economy-wide shut down in lots of industries that employ millions of people lasts and how well the government executes getting money into people’s hands,” Naymet said in March. “If it is a relatively short period of time then less damage will have been inflicted. Should this last through the summer there is deep concern lots of people and businesses will not have sufficient staying power and this could get a lot more damaging.”
— Zack Demars contributed reporting to this story.