University assets ride out market storm

by Kane Loukas

University investments have escaped the scourge of the Asian flu — at least for the moment.
With gains of more than 26 percent, 1997 was an exceptional year for the University’s portfolio. Like the vast majority of U.S. investors and institutions, the school had few hints of Asia’s economic fireworks. The trouble signs were manifest in exclamatory magazine headlines, CNN debates and news of International Monetary Fund bailout efforts — not in realized losses.
Yet some economic experts say fear remains that the dollar could be dragged down in a way similar to the East Asian currencies. If it happens, the shock would be decimating to U.S. markets and the University’s $2.7 billion in investments. But most experts said the worst has passed.
The short-term negative effects on the University have been limited to domestic companies heavily invested in Asia. Most affected investments involved electronics, like Lucent Technologies and other telecommunications communications, including Communication Liberty Group.
The University also felt the hurt in their banking stocks — Citicorp, Banc One, and NationsBank — with huge Asian interests. Citicorp lost value after reporting $100 million pretax loss due to failed Asian loans.
The damage to University accounts just after the “Asian crash” in the last week in October was noticeable, but immediate damage was erased by sustained growth.
The last three months have smiled on the U.S. economy. Wednesday saw the Dow Jones Industrial Average hit an all-time high, eclipsing last week’s record and gaining more than 1,000 points since its 554-point slip on Oct. 27. The University’s investments have reflected the market-wide prosperity.
The Asian crisis has been a blessing for some. “With a stronger dollar in relation to Asia, our dollars as consumers will go further,” said Michael Thomsen, a graduate student in applied economics.
Pressure from low-cost imports has kept inflation at a low 2 percent and interest rates have also been kept low in part by Asia’s economic demise.
The pressing question now is whether the Asian currency problem will stay on their side of the ocean.
American investors had a great advantage with a cozy, healthy economy to come home to when things got too hot overseas.
“We have as yet experienced only the peripheral winds of the Asian crisis,” Federal Reserve Chairman Alan Greenspan said last month before the Senate Budget Committee.
But before spring is over, he said the effects of tumbling currency values in Asia will be showing through here.
“All of this suggests that the growth of economic activity in this country will moderate from the recent brisk pace,” Greenspan said.
For investors like the University, Asia’s ship was slow in sinking — leaving plenty of time to pull out without a loss. The size of the University’s holdings made it easy to maneuver around the problem.
Of the University’s total assets, $35.5 million, or 6.8 percent, of endowment fund and 1.27 percent of total investments are allocated to emerging markets, according to the University’s annual report. Some of these markets are in Asia and offer higher returns at higher, but generally not frightening risks.
The fear isn’t so much that Asian stocks will fall, but that their currency problems will detrimentally affect the U.S. dollar or another fundamental component of the economy.
Asian currencies were the first to go under, slowly pulling everything else down. Warnings began in May 1997 when Thailand’s baht fell like a rock with a rapid sell-off by currency speculators.
Over several months, one Asian currency after another took on weight and fell against the dollar. In July, the IMF was called in to assist Thailand. Late July saw Malaysia’s ringgit hit a 38-month low while Indonesia’s rupiah, Manila’s peso and the Philippines’s peso descended close behind it.
On Aug. 11, the IMF and other Asian nations offered Thailand a $16 billion rescue package; but two days later, despite the aid effort, Thailand’s rupiah hit an all-time low.
When the bottom dropped out of Hong Kong’s stock market on Oct. 23, it was Asia’s economic death knell. And it was a guarantee that what capital hadn’t already run back to the West would soon take flight faster than Greenspan could say “irrational exuberance.”
A positive point for the United States is that investors are already returning to Asia after October’s rush for the door. Companies like First Pacific Co. are making billion dollar bets that Asia will recover sooner rather than later. First Pacific is bailing out bankrupt companies. Asian markets have already made significant recoveries despite their floundering currencies.
“This will not be a fundamental problem in the long run,” said James Houck, head of the applied economics department. “The economies are pretty strong and the IMF and Asian Banks have been effective at forming a fire wall to prevent a widening crisis.”
A big worry is that Japan will allow its currency to devalue under pressure from Korean manufactures. The two economies are closely knit and Korea is getting beaten down by the difference in currencies. The Asian economies, though significant, are without the ability to cripple the United States, said a senior Malaysian official last week.
Japan’s economic strength is second to the United States, and if the yen gives in to regional pressure, the dollar will feel the strain.
University Office of Asset Management officials said they are expecting another positive year. The Asian situation, as it stands, gives little reason to make major changes in University investments, said Sheila Warness, Asset Management associate director.