Denison University is a small private liberal arts college located in Granville, Ohio; it has fewer than 2,500 students. The school, founded in 1831, has a solid reputation, holding a place in the upper levels of US News’ rankings for liberal arts colleges. However, from an investment professional’s point of view, it stands out for reasons other than academics or tuition. During the 2007-2012 time period, its endowment (described as “midsize”) achieved an annualized five-year return of 4.1 percent, according to Institutional Investor, trouncing the endowments of Harvard and Yale, which saw annualized five-year returns of 1.24 and 1.83 percent, respectively.
Adele Gorrilla is the chief investment officer of Denison’s $740 million endowment, joining the university’s investment office in 2008. She spoke recently with the Journal of Indexes about Denison’s financial success.
JOI: Would you talk about Denison’s endowment a little bit and how much it has in assets?
Gorrilla: The Denison endowment now stands, as of the end of January, at right about $740 million, which is sizable, considering it’s supporting a small liberal arts school with 2,100 undergrads. Per student, that’s fairly high. The mission of it is purely to support the institution. The 5 percent spending rate is used to supplement the operating budget. That 5 percent spending per annum services about 30 percent of the operating budget.
JOI: Does asset growth mostly come from investment appreciation, or is a lot of the growth coming from donations?
Gorrilla: It’s a mix of both. In order to keep it growing, we’re dependent upon having new gifts as well as being able to generate the investment returns. Historically, we’ve done very well and have been able to earn above our spending rate, which has allowed the endowment to grow.
JOI: I noticed you had really good performance over the 2007-2012 time span, and you beat Harvard and Yale in terms of performance. To what do you attribute that performance?
Gorrilla: In part, timing. It’s not just pure luck—though some of it is definitely a function of being in the right place at the right time, and not purely by insights.
Denison is a heavy user of alternatives. Historically, it was an early adopter of hedge funds, and that was due to the composition of the board and the investment committee—they found comfort in the idea of hedge funds allowing them to still access equitylike returns but with less volatility.
At its peak, Denison had 50 percent of the investable assets in hedge funds. That percentage has since come down, and we’ve used some of that performance and some of the allocation to help fund less liquid strategies. But in part, we were able to weather the financial downturn a bit better than others, because we were later to the game in private equity and real assets.
JOI: So you basically invested in those assets when everything tanked?
Gorrilla: We did a little bit of that. We also had a very strong stable of hedge fund managers that helped reduce the impact of the financial blow of the crisis.
JOI: So, the hedge funds outperformed during the financial crisis?
Gorrilla: They have outperformed throughout for us.
JOI: How do you select the various hedge funds?
Gorrilla: It’s something we spend the majority of our time on—reviewing and selecting funds. That is the most difficult thing. The board helps set the asset allocation and the targets for us, and the team here is responsible for selecting the managers. We have a formal process of going out, meeting them, hearing new ideas. Once we find some we like, it’s a matter of comparing them to others that we’ve heard about, and then getting down into the weeds.
JOI: What percentage do you have in hedge funds right now?
Gorrilla: Forty percent.
JOI: Are there other alternative investments, besides hedge funds, in the portfolio?
Gorrilla: Yes, there are. We also do private equity investing, and in our case, we include venture capital, growth equity, distressed debt investing and buy-outs in that category. That’s another 20 percent in policy allocation. And beyond that, we also do natural-resource private investing.
JOI: There are more and more products coming out that are based on indexes that seek to mimic alternative-type investments, such as ETFs that aim to replicate hedge-fund strategies. Do you think that indexes can accurately capture those returns?
Gorrilla: Effective hedge-fund replication is limited to a narrow slice of strategies, those with quantified rules. To invest well in more fundamental or subjective hedge fund strategies, I believe it requires an active manager.