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Strategist James Walsh looks to innovation to boost endowment, building on soaring investments

As he completes his first year as Cornell's chief investment officer, James Walsh describes the university's investment returns during the past 12 months -- a record 25.9 percent -- as "terrific."

Cornell's endowment currently has a market value of approximately $5.5 billion, up from $4.3 billion in the fiscal year ended June 30, 2006. Investment returns added $1.2 billion in fiscal 2007 compared with $696.6 million in fiscal 2006. Overall, the university had an extraordinary year in investing and fundraising; its net assets -- that is, total assets less liabilities -- increased by $1.3 billion to more than $7.8 billion, a 19 percent growth from a year earlier.

But Walsh's thoughtful eyes were looking at the future, not the past, during a recent interview. "What focuses our attention is not so much the actual size of the endowment today but how we can grow it sustainably over a period of time," he said. "It's a long-term game. Those returns weren't mainly over one year. You're seeing five to six years of good decision-making, particularly over the last three years."

One of the objectives of Cornell's current $4 billion "Far Above" campaign is to increase the endowment's size, because the more the endowment grows, the less Cornell must rely on other sources of revenue -- particularly in an era when the cost of delivering a Cornell education and conducting world-leading research continues to grow faster than inflation. A larger endowment also helps control tuition increases and helps Cornell attract and retain the best faculty and students.

Endowment gifts are critical to the campaign, and the Investment Office plays a vital role in maintaining the value of these gifts, because for all Cornell's investment success over the past year, it has the lowest per-student endowment in the Ivy League and the 18th largest college endowment nationwide. Walsh wants to improve those rankings.

"Our aim is to be right up there at the top, but that's not something that happens overnight," he said. "There's always a bit of a tradeoff between rapid growth and stability. My vision for Cornell's endowment is to be one of the top Ivy League and Ivy League Plus endowments over a sustained period of time. What we need to do now is to move the Cornell endowment from being good to being excellent."

There is a lack of understanding among the public of how endowments help make up the shortfall between tuition and the real cost of educating students. About 10 percent of Cornell's annual revenue currently comes from its endowment.

Walsh credits the board of trustees' investment committee, chaired by Paul Gould -- managing director of investment bankers Allen & Co. -- for the university's gains. "A lot of credit goes to them for shifting the asset allocation from more traditional strategies to more alternative strategies." Over the past four years, he added, the committee has also grown the investment office from small- to medium-sized with a staff of 20.

"Importantly credit goes to the staff here who over the past three or four years has been putting this portfolio together," he said. "We did well in a number of areas, plus the markets have been kind to us over the past four years."

That is, until about June 30. Then, as Walsh pointed out, the financial markets weakened. Now, most economists are predicting a period of lower returns, with some suggesting recession.

Walsh believes Cornell will ride out the storm. "What we've done collectively is put together what we believe is an all-weather portfolio," he said. "We had the good sense to invest with some of the best private equity firms [and] real estate firms over the last few years. We're in a fortunate position to have cash we can invest. We can weather the tough times better than other people, and over the long run we'll have a better return."

The Cornell Investment Office is looking for undergraduates for its summer internship program, offering hands-on experience in investment management.

"We're focusing on people who we think will be candidates to join our office on a full-time basis the following year," says Chief Investment Officer James Walsh. "The intern program is hugely useful to us in finding the best people to work in our office."

The Investment Office is a "fantastic springboard" for new graduates, Walsh says. "We get access to some of the best investment managers in the U.S. and internationally, whether it's in private equity or real estate or hedge funds. Anyone who wants to go into investment management or be an entrepreneur and build a business and wants to access the capital markets can learn a lot by seeing what we're seeing and talking to who we're talking to."

Travel is also part of the job. Walsh said members of the investment team have traveled to New York, Connecticut, San Francisco, London, China and Eastern Europe in the past few months.

Information about the internship program can be found at http://www.investmentoffice.cornell.edu and in CornellTRAK.

Before coming to Cornell, Walsh was executive director of strategy and alternatives for Hermes Pensions Management in London, manager of the United Kingdom's largest pension fund. His financial expertise earned him The Independent newspaper's Golden Guru award in 1999. He and his family have found the move from London to Ithaca "easier than I thought it would be," he said, noting that many of the cultural differences, like celebrating Halloween in a big way in America, are "fun."

Moving from a private fund to a university endowment held great appeal for him. "The endowment world is seen to be the innovators," he said. "Endowments are often the first to adopt new ideas and new strategies. I think they do that partly because of the governance structure. They tend to be overseen by a small group of individuals who know about investing. And the whole university environment promotes that innovation."

Investing is really a "people business," Walsh said, and an "ideas business." Though analysts put in their hours at computers, successful investing is "very much about meeting people, talking to people, learning what they're doing. It's finding the people with the best ideas who are then able to implement those ideas.

"The best investors we know about are often people, not businesses," he continued. "When you're investing money with a manager, you're committing money to a person, and one of our key roles is deciding whether we trust those people, whether we're comfortable passing some of the university's money over to them. Part of due diligence is to ensure we are investing with managers who are trustworthy and honest. We do our very best to make sure that's the case."

He added: "With the university, there's a real premium on doing well because it means there's more money for the students at the university."

The last book read by James Walsh, Cornell's chief investment officer, was "The Age of Turbulence: Adventures in a New World" by Alan Greenspan, former chairman of the U.S. Federal Reserve Board. Says Walsh: "It's a fascinating book, looking back at what he's done. He's a very, very thoughtful person, someone who's always been willing to look at the data and, if necessary, change his mind. That's one of the things that's important with investing: You have to, number one, be willing to learn and, number two, be willing to be put right."

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