To the Editor: In his February 14 letter to the Editor, Michael Scharf ’60 takes aim at the Trustees of Phillips Academy for what he characterizes as a poor performance of the academy’s endowment relative to other institutions. Mr. Scharf is misinformed, not only about the performance of the Academy’s endowment, but also about how the school manages its investment assets. Allow me to set the record straight. As background, I want to clarify the components of the apparent $140 million decline in the Academy’s endowment value between March 31, 2000, and September 30, 2002. In fact, the endowment sustained a $90 million loss due to performance during this interval. In addition, the Academy withdrew $80 million to support school operations during the three-year period from July 1, 1999, to June 30, 2002, and received $50 million in gifts. Finally, during this time, the Academy set aside $20 million of assets to fund annuity payments to donors, pensions, and other commitments. To place the $90 million decline due to performance in perspective, one must look at the data from comparable institutions over comparable periods of time. To parallel Mr. Scharf’s data citations, I will use June 30, 2002, as the ending point. In evaluating the performance of the Academy’s endowment, Mr. Scharf compares Andover’s results with a group that he defines as the 38 largest college and university endowments surveyed by Cambridge Associates, the Boston-based consulting firm used by the Academy. We are not familiar with this particular grouping. For many years now, Cambridge Associates has tracked and compared our results against a much larger universe of institutional endowments. This benchmark group includes more than 100 colleges, universities, and independent schools. Andover’s endowment returns for each of the past three years ending June 30, 2002 were +30.5%, –7.4%, and –5.1% respectively. The comparable median returns for the more than 100 endowments tracked by Cambridge Associates, were +10.5%, -1.5%, and –4.1% respectively. While the investment committee recognizes and is concerned about the underperformance of the past two years, it is important to note that the +30.5% investment return for 2000 generated $135 million in capital for the school. Almost all of this gain stems from the private-equity portion of the endowment portfolio, an asset class in which the Academy has invested with great success since the mid-1980s. In comparing endowment performance returns over a short period of time, one quickly learns that short-term returns can vary dramatically and that one should look at the longer-term record to judge relative and absolute performance. Andover’s longer-term performance compares quite favorably to the Cambridge Associates median. For the three-year period ending June 30, 2002, the Academy endowment achieved an average annual compound return of 4.8%, versus 0.9% for the Cambridge Associates median, a favorable 3.9% margin. For longer periods, Andover’s margin also exceeds the median, but, as one might expect, less dramatically. For the five-year period ending June 30, 2002, the Academy earned an average annual compound return of 8.5% versus 6.0% for the median, and, for 10 years, 12.1% versus 9.5% for the median. The long-term record speaks for itself. Over the past five years, the trustee investment committee has gradually reduced the Academy’s exposure to traditional equity markets by allocating funds to a new class of alternative assets, i.e., those investments that aim for equity-like returns over the long term, but whose performance does not correlate highly with the equity markets. This category now comprises 30% of Andover’s portfolio. Further, the committee routinely considers the allocation of assets to see if further changes seem desirable. Wholesale change is unlikely since the basic asset mix reflects the committee’s investment philosophy of maintaining a highly diversified portfolio to enhance returns and to dampen volatility over the long term. The asset allocation as of Dec. 31, 2002, was 37% domestic and international marketable equities; 7% private equities; 30% alternative assets; 19% fixed income securities; and 7% cash and cash equivalents. Mr. Scharf is also misinformed regarding the composition of the investment committee and the manner in which it functions. The committee includes trustees and other alumni, all of whom are investment professionals with extensive experience in managing money. The committee does not meet only quarterly as Mr. Scharf states. The committee, including its subcommittees, meets 12-14 times over the course of the year to review investment performance, to consider the allocation of assets, and to evaluate the performance of a wide range of money managers. As a member of the school administration, I wish to acknowledge the many contributions of members of the Board of Trustees throughout the years. They generously share their expertise and commitment in managing the financial assets of the Academy and in preserving our historic campus. I want to note particularly that during the recently completed Campaign Andover, trustees contributed more than $63 million toward the campaign’s total of $209 million, an extraordinary vote of confidence in the life of the Academy, present and future. Neil H. Cullen Chief Financial Officer
