Notre Dame's Investments Quarterback Takes His Team Into the Record Books


SOUTH BEND, Ind. – Notre Dame’s football team is barely ranked in the top 25 this year, and hasn’t been No. 1 since 1993. But the university’s investing business is having a year worthy of a Heisman.p. Investing aggressively in international stocks, buyout funds and venture capital, chief investment officer Scott Malpass chalked up a 57.9% return for the 12 months through June 30, transforming the university’s $2.2 billion endowment into a $3.5 billion pool of capital. Basking in glory that the “Fighting Irish” football squad hasn’t enjoyed since Tim Brown won the Heisman Trophy in 1987, the endowment was the nation’s top performer in the university category in the year ending June 30, according to preliminary surveys.p. That kind of performance wasn’t just a one-season wonder, either. With the 38-year-old Mr. Malpass calling the plays, the endowment has grown at an annualized rate of 18.1% over the last decade through June 30, soaring to 29.1% in the past three years. By contrast, the total return on Standard&Poor’s 500 index was 17.8% over the decade and 19.7% for the three years through June 30.p. The endowment returns have enabled Notre Dame to limit tuition increases to 5% this fall (the lowest such increase in 20 years), to finance new programs like the fledgling Latino Studies department, and to more than double spending on scholarships.p. “For us, the biggest risk is not being able to fulfill the dreams of our faculty and students,” Mr. Malpass says. “So our goal is to do what we need to do to achieve that.”p. Universities have been among the many beneficiaries of the decade-long bull market, of course. But Notre Dame has emerged as a winner after decades as a straggler. In the 10 years before Mr. Malpass took over full control of the endowment in 1992, its average annualized return was 13%.p. Up until 1988, the endowment was being run by a priest, an accountant and a secretary. More than a third of the $463 million fund was in bonds; the remainder in blue-chip stocks that weren’t risky but also generated little in the way of returns. As a result, recalls Father Tim Scully, a member of the investment committee: “We provided so little in aid that we were really a despised member of the [endowment] community.”p. Today Mr. Malpass oversees an 18-person department, housed in a newly renovated suite of offices under Notre Dame’s famous golden-domed administration building. Three years ago, he hired Michael Donovan, a Notre Dame classmate, to oversee the private equity investments. Other new hires, all Notre Dame graduates, monitor investments in stocks, bonds, real estate and international markets. A separate operations group keeps track of the 100,000-plus annual transactions.p. Mr. Malpass, then 26, returned to his alma mater to help run the endowment in 1988. He had spent two years advising pension-fund managers at a New York based Irving Trust, and, once back at Notre Dame, he figured it was time for the team to redefine their concept of risk.p. The trick, he believed, was to reduce the endowment’s allocation to what he considered stodgy investments like “value” stocks and bonds and increase the amount in riskier but potentially more rewarding investments. Six months after taking over full control of the endowment in 1992, he scored his first touchdown, persuading trustees to boost the allocation to venture capital to 5% from 1%.p. “I was intrigued by our tiny allocation with a few Boston firms, and wanted to know more,” Mr. Malpass recalls. “So I hopped on a plane to Boston. The more I saw, the more I was sure venture investing was ideal for an endowment that has an extremely long-term time horizon.”p. The turning point came in 1993, when Sequoia Capital gave Notre Dame the chance to invest $3 million in its new fund. The results made a lottery jackpot look like a penny-ante stuff. In 1995, for instance, Sequoia invested $1.8 million in a fledgling Internet portal created by two Stanford University electrical engineers. The company, Yahoo!, went public a year later. In return for its $18,163 initial investment in Yahoo!, Notre Dame’s investment committee received stock worth $27 million in 1996.p. That wasn’t the only coup. A $56,448 investment in Redback Networks Inc. via Sequoia in 1996 generated $21 million in Redback stock three years later. A 1994 investment in Ciena Corp., an optical networking firm, by Charles River Ventures reaped a 12,000% return for Notre Dame in three years.p. As he used up those returns to argue for increased allocations to venture capital, Mr. Malpass leveraged his relationships to expand the number of venture funds in which he participated. Partners at Charles River Ventures, for instance, helped the endowment secure a coveted spot as an investor with Kleiner Perkins Caufield and Byers.p. “For us, they are great investors,” says Ted Dintersmith, a partner at Charles River Ventures. “They hang onto the stock after we distribute it, and ask intelligent questions. It’s also gratifying to walk around the campus and actually see the results of our investments.”p. As returns have soared, so have Notre Dame’s investments in venture funds. Today, the official allocation is 22.5%: The actual venture holdings, thanks to a 385% gain for such investments in the 12 months ended June 30, represent nearly 30% of the portfolio.p. A hefty 40% of the allocated endowment is now invested in illiquid private assets, ranging from venture capital to real estate. That is twice as much as the endowment dedicates to the U.S. stock market, and dwarfs its 6% allocation to U.S. bonds.p. It also is “at the upper end of the range that we’ve seen for pension funds and endowments,” says Mario Giannini, president of Hamilton Lane Advisors, a Philadelphia-based investment-consulting firm. “But endowments don’t have the same kind of liabilities that pension funds do, so they can take on more risk.” And he adds that diversifying among the number of different venture funds with varying strategies, as Mr. Malpass has done, reduces the risk to a manageable level.p. “We’re typically not big risk takers,” says Robert Wilmouth, president of Nation Futures Association, and until 1996, chairman of Notre Dame’s investment committee. “But Scott showed everyone risk isn’t always scary and bad, and educated everyone. And there haven’t been any bad years, so we just keep rolling on.”p. Jay Jordan, a buyout and venture fund manager who now is chairman of the committee, says he doesn’t worry about the endowment’s risk level. “Let’s worry about the important things!” he exclaims. “Like what happens with the football team this season,” and whether Notre Dame can hold on to Mr. Malpass and his Midas touch.p. The soft-spoken Mr. Malpass (who prefers golfing to football) doesn’t seem like an aficionado of high-risk investing. He refuses to keep all his eggs in one basket, distributing the endowments assets among more than 100 investment partnerships. And although he won’t name names, he says he has “terminated” a few public stock funds that didn’t keep pace and stopped making commitments to new venture funds run by folks that are underperforming.p. The endowment’s investing activity and stellar returns have given Mr. Malpass a degree of fame in the close-knit world of institutional money managers. He routinely fends off job offers from rival institutions, some offering to double his salary (which he won’t disclose). Although both Mr. Jordan and Mr. Wilmouth agree that “Scott bleeds blue and gold,” the Notre Dame school colors, they are lobbying other trustees for a package that would link his pay to performance.p. “We can’t afford to lose him,” frets Mr. Wilmouth. “Under his watch, everything has done so well that as long as Scott recommends it, the investment committee is going to buy it.”p. p. Wednesday, September 13, 2000

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