Recently it was reported that the Harvard Endowment had fallen at least 22 percent and was on its way to possibly a 30 percent loss once alternative investments are considered (see previous blog post). Now, the WSJ is reporting that the Yale Endowment has fallen 25 percent since the end of June when the endowment was valued at $10.1 billion (see WSJ article). Of interest is how marketable securities in the endowment "only" fell 13 percent, giving Yale a problem similar to Harvard - decreasing alternative investments, such as real estate and private equity, have caused the overall losses to be more severe than expected. As with Harvard, the diversification and increased use of alternative investments has helped Yale weather the downturn in the equities markets, but at the cost of decreased liquidity. The subsequent fall of less traded real estate and private equity markets has introduced a form of liquidity risk that was either unexpected, uncovered, deemed unimportant, or some combination of the three.

Fortunately, such endowments do not have the same problems with redemption requests that hedge funds experience, and can therefore possibly hold assets longer, waiting for more liquid markets. On the other hand, the academic endowments do rely on their investments for funding scholarships and supporting the general operating budget, among other things. At Yale, the endowment supports 44 percent of the $2.7 billion annual budget, or nearly $1.2 billion per year. With a decline of twice this amount in the endowment, belts at Yale will definitely needed to be tightened given that a guaranteed 16 percent return on the remaining approximately $7.5 billion would be needed in order to pay current expenses and still keep the principal in place. Of course, this just got more difficult now that the market is on its back, not to mention that the only sure bet in town - Bernie Madoff and his "guaranteed return" hedge fund - are out of business. Difficult times indeed.

A recent WSJ article is highlighting once again the losses incurred at university endowments, especially those at Harvard. The Harvard endowment is reported to have lost "at least" 22 percent in the first four months of the school's recent fiscal year. This equates to approximately an $8 billion loss for the nearly $37 billion portfolio. Unfortunately, the pain may get worse as the current value does not appear to consider real estate or private equity investments, causing the university to start planning for a total decline of 30 percent for the fiscal year. While alternative investments have helped to shelter endowments at Harvard, Yale, and elsewhere from past sell-offs in the general market, this time the recent credit crisis has affect nearly every asset class. This has made the losses on relatively illiquid assets, such as real estate and private equity, potentially quite severe as portfolios are forced to sell such assets at deep discounts. Private equity investments with Harvard are reported to only be receiving bids of 50 cents on the dollar. Diversification and investing in alternative investments has its benefits, but it can also introduce new risk to manage, such as liquidity risk. Certainly a lesson we all need to be taught, even if we have to learn it the hard way.

Even with the downturn in the residential housing market, and credit issues that continue to make front page news, as of the end of September REITs have generated total returns including dividends of about 1.8 percent year-to-date (see Investment News article). During the same time the S&P 500 was down 19.3 percent, the Nasdaq was down 21.1 percent, and the DJIA was down 18.2 percent.The REITs that are outperforming include the self-storage REITs, which are up 33.8%, health care REITs, which have risen 18.5 percent, and apartment REITs, which are up 17.4 percent. Not surprisingly, the worst-performing REITs are those tied to mortgages, with returns down 31 percent. Other poor performers include the lodging REITs, down 26.7 percent, and the industrial REITs, down 25.4 percent. The wide range in returns continues to illustrate that not all REITs are created equal, in part due to their varying levels of exposure to the current credit issues that are gripping the market.

In fact, if you still find the US market a little too uncertain, looking outside the US may prove beneficial. The Canadian real estate market appears to not have the same level of exposure to the recent US housing-related problems due to their real estate market having a more stringent regulatory structure (see Seeking Alpha article). Unfortunately, many of the REITs in this market have already had a nice run after being oversold last year, and may provide less current opportunity (see past Trader's Narrative blog post for a listing of Canadian REITs). On the other side of the globe, Northern Trust has recently launched a new Japanese REIT, although it is also not clear if the timing is right given possible credit exposure in the Japanese markets, along with the low liquidity and volatility of the product (see Seeking Alpha articles here and here). Nonetheless, many Japanese REITs do have exposure to commercial real estate, as opposed to residential real estate, making them currently more attractive. Analysts are also speculating that the market has finally reached rock bottom in Japan and is therefore due for a correction, although many have been making this call for a while now.

It is never a good sign when your company is in financial trouble to find out that reporters, analysts, and private equity investors are suddenly interested in the value of the building that houses your headquarters. As reported in a Here Is The City News article, apparently this is exactly what some at the Financial Times and elsewhere are doing. The Lehman Brothers Times Square headquarters building is estimated to be worth $1.3 billion, or about twice what Lehman paid for the building in 2001. When you add its worth to that of asset manager Neuberger Berman, which may be valued anywhere from $6.5 to $13 billion, the sum of the two could dwarf the current market cap of Lehman, currently around $9 billion. This of course opens up the possibility of value for investors, or more likely, private equity investment (see a recent Bloomberg article on the private equity companies interested in Neuberger Berman).

This week it was also reported in a MarketWatch article and elsewhere that Lehman is planning to cut 1,500 jobs, and is also developing plans to off-load some of its real-estate loans (see the WSJ article). The company has $40 billion in commercial real estate assets and another $24.9 billion in residential assets. Lehman is desperately looking for ways to unload the mortgage-related assets for more than the 22 cents on the dollar that Merrill Lynch received (which was even worse when you considering the financing deal Merrill offered Long Star). The sale of these toxic assets may eventually make it easier to value Lehman Brothers, moving them from a "bad bank" to a "good bank" (see an interesting article by Roger Ehrenberg on the importance of separating such assets). By getting the hard to value assets off the balance sheet, Lehman should go a long way towards allowing investors to see the real value in the company, and in the process hopefully reverse the trend of their decreasing market cap. Unfortunately, it may take a fire sale of their good assets to keep them afloat long enough to see it happen. Another reason why a quick and sensible sale of their mortgage-related assets is so critical.