Dickinson College Homepage Dickinson Magazine This issue of the Dickinson Magazine was mailed on Monday, October 3, 2005
From This Issue
Volume 83 • Number 2
Fall 2005

From Fine Arts to Finance
Annette Smith Parker '73 uses creativity to build assets
As fiscal year 2004-05 concluded in mid-2005, Vice President and Treasurer Annette Smith Parker ’73 talked with Senior Editor Sherri Kimmel about college investment strategies, particularly the practice of gathering younger alums, who are investment professionals, into advisory groups. Parker joined the college in 1988 as assistant treasurer and served as associate vice president/comptroller for several years before becoming vice president and treasurer in 1999.

You’re a Phi Beta Kappa, summa cum laude fine-arts and art-history graduate of the college. I think you definitely qualify as a real liberal artist—going from fine arts to finance. Can you talk a bit about how this occurred?
I don’t really think it’s such a broad step. Actually, when we start talking about the way we’ve dealt with financial situations at the college and what we’ve tried to accomplish, I think you will see it’s taken creative ideas, thinking outside the box. So if that is what a liberal-arts education is supposed to prepare us to do—to find connections, to put the pieces together in new ways—maybe that’s what I’ve done with my career and with my life. Being able to integrate apparently disparate disciplines or even occupations has been a lot of fun. I started out as a Dickinson student thinking I would be a math major and found that I liked the practical application of math rather than the theoretical side, so I started taking accounting courses, and I liked them. But when I found fine arts, all of a sudden the integration of disciplines became apparent. In art history, the politics, economics, morality, sociology, religion of the time—everything—came together in the art. Our discussions became very interdisciplinary.

We talk a lot about interdisciplinarity now at the college and the exciting discoveries that occur in the connections. That’s what we have tried to do with the [college’s investment] projects with our alums. It’s a new approach for the college and in higher ed—trying to tap the potential that lies in folks with Dickinson degrees, asking them to help us find solutions to the way we deal with our finances. I’m not a terribly linear person. The hardest job I’ve ever had in my life was as comptroller of the college. Staying really linear to complete audits and compile financial statements wasn’t natural to me. Financial-statement prep is really rigid.

So there wasn’t a lot of creativity in that.
[Laughs] No, I tried not to be creative in accounting. That can get you into trouble! People would ask me, “How do you like your job,” and I would say, “Well, I love the college ...” but I really didn’t love my job. I love my job now, because I can be creative about how we’re going to attack different problems or issues in higher education for the college. This is the fun part.

It’s been since ’99 that you’ve been doing the fun stuff. The linear stuff is behind you.
Yes, but if I hadn’t had that background I couldn’t do what I do now. I can study financial statements and really read between the lines. I make connections that only come from having developed budgets and created financial statements for years.

Can you give me an idea of the areas that you oversee for the college?
The budget and all general-ledger accounting report to me, so financial operations as a whole. Accounts payable. Accounts receivable. Student accounts. Payroll. Student payroll. Accounting for the international programs. The debt portfolio and borrowing. Those all roll into this office. But I’ve tried to focus on the investments for the last few years, because I think there’s a tremendous amount of potential to benefit the college. In 1999 the endowment stood at $160 million. Preliminary totals on the endowment for June ’05 indicate we’ll hit $250 million. Being able to increase the returns by 1 percent makes a huge difference to the institution.

What is the college’s operating budget at this time?
The operating budget is about $80 million on a net basis. What that means is, if you consider financial-aid grants as a discount to tuition, or negative income instead of expense, the budget is $80 million. On a gross basis it’s $100 million. Institutionally supported financial-aid grants total a little over $20 million a year.

Why is it so important to build the endowment?
Endowment, that is, our investment portfolio, is intended to support programs consistently over time, and this provides a number of things for the college. One is permanence. You start a program, you can continue that program. That’s really critical to the sustainability [goal] that’s in Strategic Plan II. We’re putting so much emphasis on our endowment, because it provides us with continuity and sustainability for the finances of the institution going forward. Additionally, it gives us flexibility. At about $200 million there are different opportunities that start to become available to an endowment. Liquidity isn’t as much a worry. We start taking more long-term investments, things that won’t pay off quite as quickly, but which can boost returns over time. [The current level of the endowment] is a real benefit to the college, especially as we move toward the five-course load [for faculty], toward better support for scholarships, with what we’re doing internationally, toward all of our strategic initiatives. We need to have the kind of endowment support that makes programming sustainable.

According to a New York Times article the goal each year for a college is to generate enough of a return on investment to cover inflation, spend about 5 percent of the total assets and cover fees without depleting the endowment. How are we doing with that equation?
Pretty well and getting better. For fiscal ’04—the year that ended June 30, 2004—investment returns totaled 19. 3 percent. Inflation for our region is about 3.5 percent and, right now, our spending policy is 5.3 percent. Together, that’s about 9 percent needed to cover the absolutes. Add some growth and we’re shooting for 9-10 percent. Many analysts think that’s unsustainable, but last year we hit 19.3 percent and over the last 20 years, our returns have been about 12.5 percent, including the worst bear market since the 1930s, between 2000 and 2002. We’re building our endowment at a very rapid rate and can’t expect returns like that all the time. In fiscal year 2004, Dickinson’s returns placed us in the top 10 percent of all institutions, not just colleges, but all institutions, the Harvards, the Yales. Preliminary results for June 30, 2005 are very strong. The pooled endowment earned about 12.6 percent. Overall, the endowment grew by 27 percent.

What factors would you say have enabled us to reach the upper echelons of investment returns for all colleges and universities?
I think we have an outstanding approach to our endowment, and the people that we’ve put together have done an extraordinary job, both with asset allocation and [fund] manager selection.

Are you talking about the investment committee of the board of trustees, which is chaired by Tom Kalaris [’76], with Michele [Mahoney] Richardson [’85] as vice chair?
Absolutely. Tom and Michele have done a great job. So did [previous chair] Marc Stern [’65]. If you read the financial section of the Strategic Plan, and you think about the Strategic Plan’s distinctive characteristics and enabling conditions, the first enabling condition is our people. This is absolutely the first priority when you think about how we’ve achieved what we’ve achieved over the last five or six years. The second enabling condition was financial stability and now, in Strategic Plan II, it’s financial strength. In 1999, financial stability was critical. We were running a deficit of $6 million a year and were spending from our endowment at 6 percent per year.

Now we’re budgeting a $2 million surplus annually, and we’ll come in with about $3 million surplus this year. We’ve dropped the level of spending from the endowment to 5.3 percent and plan to decrease it further to 5 percent by 2010. This is an important move toward sustainability. Between 1998 and 2002, while running deficit budgets, we consumed $15 million of reserves. On June 30, 2005, operating surpluses finished repaying the reserves for this entire amount. We’re building for the future, really moving quickly and doing a lot of good things, as well as continuing to provide access for students who can’t afford to come to Dickinson on their own. The college provides close to $22 million a year in financial-aid grants, which is an extraordinary commitment for an institution of our type. On a dollar basis it’s even higher than institutions far more heavily endowed, like Williams that has an endowment of $1.6 billion. We’re putting our money where our mouth is—into our students and also into our faculty.

One of the things the Strategic Plan dealt with was how we were going to approach our investment portfolio. Prior to 2000, the investment committee was actually a subcommittee of the board’s finance committee. Marc Stern and I thought it was important to revamp the investment committee into a much smaller, more agile committee of investment professionals. We started out with four investment professionals who were already on the board and created two slots for nonboard members with specific investment expertise. It actually became the beginning of our Young Turk Project—to bring on two alums who were not board members, who had expertise, who really wanted to give back something to the college through their expertise. John Cregan [’77] and Margaret [Stewart] Lindsay [’73] joined the investment committee first and became members of the board of trustees later—a shift from the normal board-recruitment process. Our committee is agile, we’re on the phone every couple of weeks, more frequently when we’re making major changes, as well as the four regular meetings a year in New York and many more when we’re doing projects. So people are really committed, and they work very hard at it.

You were talking about the Young Turks group of younger alumni investment professionals, and said you started out with a couple of members. Now there are 25 to 30 people.
Right. Actually, we found a great idea at Williams College and we were able to modify it and make good use of it. When Marc was the chair of the committee, he asked a colleague at TCW, who is the chair of the investment committee at Williams, to speak to our investment committee. Williams uses a model of subcommittees in its investment committee, including the participation of alums not on the board. And we went, “Aha!.” This is a great way to engage our alums, to benefit the college through their expertise, maybe to have development linkages for the future, and to help people feel like they’re connected to the college. So we started to put together these groups to look into specific asset classes. The first project focused on distressed debt [purchase of bonds from companies that are going through bankruptcy reorganization].

It sounds like your strategy of investment has some risk involved. You’re not just sitting back.
That’s a really interesting point. It wouldn’t be prudent to invest all your money in distressed debt, but there’s a theory in investing that it is possible through diversification to insert riskier asset classes into a portfolio and actually decrease the overall risk in the portfolio. In essence, some assets will do poorly when others are doing well. Some zig when the others zag. You actually reduce the risk in the portfolio as a whole through diversification.

So you’re not putting all of your eggs in one basket.
Exactly. It’s also what I’m trying to do right now for our [employees’] retirement portfolio. I’m working with the HR office to provide employees with more opportunities for investment. I think it’s riskier for them to have limited options—many of which are correlated to act the same way in both up and down markets. Employees who really want to expand the kind of investments that they hold in their retirement should be able to be more active. They ultimately bear the responsibility for preparing for retirement, and we need to give them better tools. And I don’t think it’s riskier. I believe diversification lowers risk.

So you’ve created approaches that have worked for the investment portfolio for the college, and now you are moving them over to the personal investment portfolios of individuals who work for the college.
It’s important. I don’t think that we have given people all of the tools they need. Some people won’t want to use them. But if they do want to be actively engaged in their financial futures, I think we need to give them the education and the tools.

Back to the Young Turks. You’ve talked about distressed debt, which was one project for one particular year, but you’ve had other projects.
As the equity markets started to rebound in 2003, the opportunities in distressed debt started to dry up, so you’re right, we’ve already taken some of that money off the table. The next year we did a core real-estate project—private equity real-estate investing with a number of other colleges and foundations in a pool, with good diversification by geography and type of real estate. A different group of people—all alums, all real-estate professionals—taught us a lot about the asset class and helped us find “the rising stars” in their world. Since then, we’ve done an alternative investment [hedge-fund] project. When we wanted to find a new large-cap equity manager we used the same [Young Turk] model. We’ve done projects in secondaries [a way to access private-equity investments more quickly], then opportunistic real estate and, just recently, we finished two projects in international equities and emerging markets. So it’s been a wonderful model for us. Whenever we start to talk about a new strategy or asset class, we pull together a group, a couple of people from the investment committee and some folks from our Young Turk bank.

You mentioned your bank of Young Turks. How do you find these folks?
That’s a good point, because from a development perspective, we probably need to go back to our alums again to refresh the database. We use the [college] database to identify people who work in the financial-services industry. We’re looking for people who actually do the investing, not those in marketing or management. And we send out letters and say to people, “We’re getting ready to do some projects. Do you want to work with us?” Many, many people have responded. We sort through those lists and bios to see where we find a good match. It usually sifts out to five or six to work with one or two people from the investment committee on a project. We also use Cambridge Associates as our investment adviser. They do a lot of the nuts-and-bolts research and analysis for us.

Is there an overarching philosophy that the college employs in its investment strategy?
One of the terms that’s floated around is “maximizing returns.” For us, it’s more like “optimizing returns,” because we want to maximize returns within an appropriate consideration of the risk and cash-flow needs of the institution. Institutional investing is different from personal investing, because we expect the college to be here in perpetuity and so your quote from the [New York Times] article is important—trying to best inflation and cover your spending with a little left over for growth. We take a very long-term view of average returns, but to make 9 percent or so per year requires a certain asset mix. We push for returns, without getting too far out on the risk limb.

Would you say that Dickinson’s approach to investment is unusual in higher education?
We certainly make use of our alums far more than most institutions. I’d say we’re on the leading edge.

And why is that?
The creative approach. Maybe that’s my fine-arts background. Think about the way Bill [Durden] has handled this administration, that is to say, “There are new ways of looking at the world, and we’re going to be a leader.” And we are a leader. I think that when we talk about the Young Turk Project, what we’re trying to accomplish in our strategies for investing, how we’ve handled the finances of the institution, what we’ve accomplished with the budget—restoring healthy surpluses—what we want to do with reporting for the executive level, for the board and the senior managers, as well as budget managers, with our new financial system—we are trying to get out there on the leading edge, so that we can take advantage of what the business world can give to us, so that we can run our own “business” more efficiently, more effectively and more creatively so that our academic and residential programs have the right resources. Higher ed can be very much behind the limestone walls, and people can rest on their laurels and do the same thing the same way for many, many years. One of the reasons Dickinson has been able to move so quickly since 1999 is that we’re not willing to do it the old way. We’re trying to find new opportunities, many of them coming from models in different places in the world, whether it’s other institutions of higher education that have more resources or whether it’s business. We’ve tried to take advantage of that. I guess you’d say we’ve engaged the world of finance.

To read more about Dickinson’s approach to building its assets, see the Financial Strength portion of the Strategic Plan at: www.dickinson.edu/plan/


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