<% ' AvantGo:MarketClose %>DJIA 8783.14 +76.99 (+0.88%) S&P 500 1118.67 +7.83 (+0.70%) Nasdaq 1823.57 +35.14 (+1.96%) Value Line ndx 883.44 +12.25 (+1.41%) 30-Year Bond 102 19/32 -1 22/32 5.32@ Yield<% ' AvantGo:End %>
<% ' AvantGo:Heroes %>Disk drive head suspension assembly manufacturer Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> spun $5 3/8 higher to $27 1/4 after reporting a fiscal Q4 loss of $0.67 per share, which was not quite as bad the loss of $0.71 per share expected by the Street. The company noted a 52% sequential surge in shipments of more advanced trace suspension assembly products, as well as a pickup in conventional suspensions shipments late in the quarter, prompting the firm to forecast a profitable Q1. Several analysts (including one right here at the Fool) viewed the news as another piece of incremental evidence that the sector is coming out of its more than year-long slump. Elsewhere in disk drive land, Seagate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> rose $2 to $29 11/16, Western Digital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> added $1 5/8 to $14 1/4, Quantum <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %> gained $2 11/16 to $21, Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> advanced $1 1/4 to $13 7/16, Komag <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %> moved up $1 to $7, and Maxtor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MXTR)") else Response.Write("(Nasdaq: MXTR)") end if %> jumped $2 1/16 to $13 3/8.
Electronic design automation (EDA) tools developer Cadence Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %> marched $5 5/16 higher to $25 5/16 after saying it will take a roughly $36 million restructuring charge in Q4 to account for a 12% reduction in its global workforce, which works out to about 560 employees. The restructuring will focus in Cadence's services business, which failed to meet the company's growth expectations in Q3 despite the unit's 68% year-over-year revenue jump during the period. The company is hoping the restructuring will trim $8 million in costs from its Q4 results and lead to another $60 million in cost savings in fiscal 1999. The news gave some analysts a greater degree of comfort with the fiscal 1999 EPS guidance of $1.40 to $1.45 per share provided by the company recently during its Q3 conference call. BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive."
QUICK TAKES: Casual clothing designer Tommy Hilfiger Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOM)") else Response.Write("(NYSE: TOM)") end if %> hip-hopped its way $9 1/4 higher to $55 3/4 after reporting fiscal Q2 EPS of $1.20, beating the Street's mean estimate by a dime. The company said the integration of licensees Pepe Jeans USA and Tommy Hilfiger Canada, which were acquired in May, is "proceeding very smoothly"... Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> gained $2 3/16 to $65 9/16 in anticipation of the company's fiscal Q1 earnings report. After the bell, the router maker reported EPS of $0.34 versus $0.26 a year ago, beating the First Call mean estimate by a penny... Internet portal firm Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> gained $9 1/4 to $151 3/8 after the company's Yahoo! Europe arm formed an alliance with telecommunications firm British Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> to launch a U.K. version of Yahoo! Click, which is a pay-as-you-go Internet access service and Web guide.
Bank holding company First Union Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> picked up $2 1/8 to $61 after announcing a 50 million share stock repurchase plan... Zip drive maker and Fool Port holding Iomega Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IOM)") else Response.Write("(Nasdaq: IOM)") end if %> climbed another $1 to $8 today on continued positive sentiment following the bankruptcy of rival SyQuest Technology Inc. earlier this week. The company's shares have gained 47% so far this week... Semiconductor yield management and process control systems manufacturer KLA-Tencor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> moved up $1 5/8 to $32 7/16 after announcing plans to cut its global workforce by about 220 people, or 5%, which will result in a restructuring charge and a net loss in its fiscal second quarter.
Steel products maker USX-U.S. Steel Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: X)") else Response.Write("(NYSE: X)") end if %> advanced $1 5/16 to $26 11/16 after saying it will lay off or reassign 850 workers at its Fairless Works plant outside of Philadelphia as part of a 70% production cutback at the mill, which was brought on by "record levels" of steel imports... Electronics connectors maker AMP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMP)") else Response.Write("(NYSE: AMP)") end if %> rose $2 5/16 to $42 1/8 after A.G. Edwards raised its rating on the stock to "maintain" from "reduce"... Entertainment and consumer products direct marketer K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> danced up another $1 11/16 to $14 15/16 after rising yesterday on news that it will operate a co-branded online music store on the namesake Web site of Playboy Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA)") else Response.Write("(NYSE: PLA)") end if %>. Last night, K-tel said its new president will be Lawrence Kieves, who is a cousin of Chairman and CEO Philip Kives.
International telecommunications carrier Pacific Gateway Exchange <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PGEX)") else Response.Write("(Nasdaq: PGEX)") end if %> gained $10 13/16 to $39 15/16 after Salomon Smith Barney started coverage with a "buy," saying the company could grow at a 50% annual rate over the next five years... Poultry producer and processor Tyson Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSN)") else Response.Write("(NYSE: TSN)") end if %> hatched a $15/16 gain to $24 15/16 after Merrill Lynch raised its near-term rating on the company to "buy" from "accumulate," citing in a research note the firm's "dominant market share and improving cost structure"... Digital subscriber line (DSL) systems designer Orckit Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCTF)") else Response.Write("(Nasdaq: ORCTF)") end if %> advanced $1 5/16 to $16 1/4 after signing a sales and marketing agreement with telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, which will sell Orckit's Asymmetric DSL products to Lucent clients in Europe, Africa, and the Middle East. Lucent was up $4 5/16 to $86 1/2 as well.
Casino operator Station Casinos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STN)") else Response.Write("(NYSE: STN)") end if %> rolled $1 1/16 higher to $7 7/8 after Credit Suisse First Boston and Bear Stearns upgraded the company today. Also, Missouri voters agreed to let certain "boats in moats" riverboat casinos remain open, including one operated by Station in Kansas City... Digital video compression company C-Cube Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CUBE)") else Response.Write("(Nasdaq: CUBE)") end if %> gained $2 11/16 to $23 15/16 after BT Alex. Brown raised its rating to "strong buy" from "market perform"... Hollywood Entertainment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLYW)") else Response.Write("(Nasdaq: HLYW)") end if %> sashayed $2 1/4 higher to $19 after Dain Rauscher Wessels upgraded the video rental store operator to "strong buy" from "buy."
Earnings Movers
Beazer Homes USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BZH)") else Response.Write("(NYSE: BZH)") end if %> up $2 1/8 to $22 15/16; fiscal Q4 EPS: $1.37 vs. $0.87 last year; Estimate: $1.28
Information Management Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMRS)") else Response.Write("(Nasdaq: IMRS)") end if %> up $3 1/4 to $27 3/8; Q3 EPS: $0.20 vs. $0.10 last year; Estimate: $0.17
Seitel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEI)") else Response.Write("(NYSE: SEI)") end if %> up $1 3/4 to $15 5/8; Q3 EPS: $0.28 vs. $0.25 last year; Estimate: $0.25
Silverleaf Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SVR)") else Response.Write("(NYSE: SVR)") end if %> up $2 1/16 to $14; Q3 EPS: $0.42 vs. $0.33 last year; Estimate: $0.40
Unigraphics Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UGS)") else Response.Write("(NYSE: UGS)") end if %> up $1 11/16 to $11 5/8; Q3 EPS: $0.13 (including amortization charges) vs. $0.16 last year; Estimate: $0.08<% ' AvantGo:End %>
<% ' AvantGo:Goats %>Life sciences company Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> fell $4 5/16 to $38 1/8 after its Searle pharmaceutical unit said it closed enrollment for its safety trial for orbofiban, a drug designed to block the formation of blood clots, as a "precautionary measure." The decision came after researchers couldn't explain why data from one test group receiving the same dosage as another showed "an unexpected excess of early mortality." Orbofiban, which is intended to fight repeat heart attacks and other serious cardiovascular events in heart patients, is in the last of three developmental stages. A Monsanto spokeswoman said overall death rates have been lower than expected during the Phase III trial, and Searle plans to finish treating the 8,000 individuals who have already been given 30 days of therapy. Monsanto said xemilofiban, a similar developmental drug, is not affected by this announcement.
It only took one piece of bad news to leave two companies gasping for air today. Allergy and asthma drug developer Dura Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DURA)") else Response.Write("(Nasdaq: DURA)") end if %> and related company Spiros Development Corp. II <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDCOZ)") else Response.Write("(Nasdaq: SDCOZ)") end if %> were pulled down after they announced that the Food and Drug Administration has said it won't approve a next-generation asthma inhaler until "certain deficiencies" are addressed. Dura dropped $2 5/8 to $9 3/4 on the news, while Spiros -- a separate company run by the same management that went public last December to raise more capital -- spiraled down $3 1/16 to $7 11/16. Dura, which has exclusive rights to manufacture and market Spiros products, now doesn't expect to be able to launch the product before 2000. Although Dura originally hoped for an early 1999 introduction, CEO Cam Garner said the company hadn't expected the inhaler to contribute to 1999 earnings, and forecasts for that period remain unchanged. Several brokerages downgraded Dura today.
Like quarters falling off a plate at an unwinnable carnival game, shareholders of American Coin Merchandising <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMCN)") else Response.Write("(Nasdaq: AMCN)") end if %> watched their money slide from view today. American Coin, which operates skill-crane machines that dispense toys, jewelry, and other items, lost $5 3/4 to $10 3/8 after the company said it expects Q3 EPS to be below second-quarter levels as amortization of goodwill from recent acquisitions jacked up general and administrative expenses. Those expenses are expected to continue to climb into 1999 now that the company has to handle its own plush product warehousing in the Seattle area because the public warehouse it had been using was too small. During the move to the new warehouse, American Coin ran into further costs that are expected to hurt Q4 EPS as well. Two analysts had predicted a mean Q3 EPS of $0.23, up from Q2's $0.21 result, while Q4 estimates were at $0.37.
QUICK CUTS: Entertainment empire Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> fell slightly today, dropping $15/16 to $28 5/8 after fiscal Q4 earnings were hurt by declines at the box office domestically, lower international home video sales, and higher programming costs at its ABC network. Walt's world reported EPS of $0.14 (including a $0.02 charge), a penny off Street projections. For more info, see today's Breakfast With the Fool... Coronary stent and related medical devices maker Boston Scientific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> lost $2 7/8 to $43 1/2 after falling $5 7/8 yesterday before being halted. After the halt, the firm said it has discovered improperly booked sales in its Japanese operations... Beringer Wine Estates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERW)") else Response.Write("(Nasdaq: BERW)") end if %> dropped $4 15/16 to $42 3/4 after BT Alex. Brown downgraded it to "buy" from "strong buy."
Casual restaurant operator Applebee's International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APPB)") else Response.Write("(Nasdaq: APPB)") end if %> was eaten for lunch, losing $1 15/16 to $17 3/4 after saying it expects Q4 EPS of between $0.38 and $0.40, below the Street's $0.43 consensus estimate, on low franchise development and slower sales at its Rio Bravo restaurants. Full-year 1999 EPS is expected to be between $1.85 and $1.90 versus analysts' $1.97 projection... Telecommunications networking services company e.spire Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESPI)") else Response.Write("(Nasdaq: ESPI)") end if %> was disconnected for a $3 7/8 loss to $8 after it called in a Q3 loss of $1.00 per share, a dime wider than last year's loss and two cents below market projections... Photronics Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAB)") else Response.Write("(Nasdaq: PLAB)") end if %>, which makes photomasks used in the production of semiconductors, tumbled $2 7/16 to $18 1/8 after it said sagging fiscal Q4 sales are expected to pull EPS down to between $0.10 and $0.14, well off the Street's $0.23 consensus.
Railroad operator Union Pacific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNP)") else Response.Write("(NYSE: UNP)") end if %> derailed today, losing $1 15/16 to $46 7/8 after Donaldson, Lufkin & Jenrette downgraded it to "market perform" from "buy"... Fiber-optic transmission products maker Ortel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %> dropped $2 7/16 to $10 5/16 after it said it expects to report a net loss for fiscal Q2 when it announces results Dec. 1. The extent of the loss will be known at the end of an ongoing review of operations. Analysts currently expect Ortel to report Q2 EPS of $0.07... Office products and supplies company Corporate Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEXP)") else Response.Write("(Nasdaq: CEXP)") end if %> sank $3 7/8 to $7 3/16 after it said yesterday evening that Q3 EPS are expected to fall below Wall Street's $0.16 mean estimate. Disappointing performance from several non-core units -- primarily delivery and U.K. operations -- is expected to account for a shortfall of about $0.07 per share for the quarter.
Office-equipment supplier Ikon Office Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IKN)") else Response.Write("(NYSE: IKN)") end if %> stumbled $1 7/16 to $9 after it reported a fiscal Q4 loss of $0.38 per share (before charges), compared with earnings of $0.35 per share last year and the market's expected $0.03 per share profit. Ikon still expects to achieve 1999 EPS of $0.65 to $0.75 -- the current consensus estimate is $0.72... Staffing services firm Modis Professional Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPS)") else Response.Write("(NYSE: MPS)") end if %> was downsized, losing $2 1/16 to $15 3/8 after Goldman Sachs downgraded the company to "market outperform" from its "recommended list"... Human resource staffing firm Vincam Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VCAM)") else Response.Write("(Nasdaq: VCAM)") end if %> moved back $2 to $15 1/4 after it reported Q3 EPS of $0.16, a dime above last year's mark but flat with Wall Street's projection... Biotechnology testing systems company IGEN International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IGEN)") else Response.Write("(Nasdaq: IGEN)") end if %> eroded $3 to $25 5/8 after it reported a fiscal Q2 loss of $0.25 per share, compared with $0.15 a year ago and several cents off the market's expected $0.17 loss.
Steinway Musical Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LVB)") else Response.Write("(NYSE: LVB)") end if %> didn't sound that great today, wailing $1 9/16 to $21 3/8 after it said slow export sales, particularly to Asia, have lead to a domestic oversupply, which is expected to impact results "well into 1999"... Aviation security and services firm International Total Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITSW)") else Response.Write("(Nasdaq: ITSW)") end if %> dove $1 1/16 to $4 after it said President and COO James Singer, who led the company since shortly before its September 1997 initial public offering, resigned to pursue other opportunities... Dental and medical digital radiographic imaging systems developer Schick Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHK)") else Response.Write("(Nasdaq: SCHK)") end if %> slid $2 5/16 to $17 5/8 after it reported preliminary fiscal Q2 revenues of $14.2 million, up from $8.2 million last year but held back slightly because $2.5 million in orders were booked as Q3 revenue. Schick planned to report final Q2 results after today's close... Drug research company Pharmacopia <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCOP)") else Response.Write("(Nasdaq: PCOP)") end if %> had to cope with a loss of $3/4 to $9 3/8 after BT Alex. Brown cut its rating on the company to "buy" from "strong buy."
Earnings Movers
Boron, LePore & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLPG)") else Response.Write("(Nasdaq: BLPG)") end if %> down $2 7/16 to $26 5/16; Q3 EPS: $0.24 vs. $0.13 last year; Estimate: $0.22
Coach USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUI)") else Response.Write("(NYSE: CUI)") end if %> down $3 1/4 to $23 3/16; Q3 EPS: $0.81 (before one-time items) vs. $0.60 last year; Estimate: $0.81
Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> down $2 5/8 to $55; fiscal Q4 EPS: $0.54 vs. $0.42 last year; Estimate: $0.50
Waste Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWIN)") else Response.Write("(Nasdaq: WWIN)") end if %> down $2 11/16 to $19 9/16; Q3 EPS: $0.23 (pro forma) vs. $0.16 last year; Estimate: $0.24<% ' AvantGo:End %>
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Endowments Hedging Their Bets
<% ' AvantGo:FOTH %>The near collapse of troubled hedge fund Long-Term Capital Management (LTCM) has attracted widespread attention. Yet most investors would seem to have been little affected by this debacle aside from the temporary uncertainly it injected into world markets. After all, hedge funds only accept money from institutions and from individuals with a net worth exceeding $1 million. Happily or not, that excludes most of us. If folks like Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> CEO David Komansky want to "invest" part of their personal fortunes in such high-risk ventures, that's their business.
On the other hand, there's a potentially quite troubling story hidden beneath the surface of LTCM's near demise. The institutions stuck in the middle of the recent hedge fund squeeze include endowment funds for universities and other non-profit organizations. These endowments get a fair amount of their investment capital from people like you and me, and they're supposed to be in the business of doing good works. If they're so willing to gamble our donations on emerging market debt, a backlash may be around the corner.
Although donating money to a university, for example, is commendable, few of us bother to demand real accountability in how our money gets invested before it gets spent. That could be a serious mistake. You may do better by your alma mater if you hold off on that next check until you're convinced the managers of its endowment fund have had a proper Foolish investment education.
Putting together a complete list of affected endowment funds is pretty much impossible given that few institutions want to own up to the pain caused by the recent hedge fund blow-ups. Few who advise endowments in their selection of hedge funds seem willing to give specifics either. Still, some names have begun to trickle out. Last week, the Wall Street Journal reported that the endowment fund for Yeshiva University and its Albert Einstein medical school in New York still had $5 million invested in LTCM even after the fund had returned $13 million of the endowment's money last year. Most of that $5 million is probably gone for good.
Of course, many institutions have been hurt as numerous hedge funds have taken hits on their high-risk investments. Last week's Journal article also noted, for instance, that the $2 billion endowment of the Mass. General and Brigham & Women's hospital lost nearly all of its $20 million investment in Russian bonds. Ironically, famed Fidelity Magellan stockpicker Peter Lynch, a champion of plain vanilla buying-what-you-know equity investing, sits on the hospital's investment committee. He must have been outvoted. (I'll ask Lily Tomlin next time I see her.)
No doubt some endowments have enjoyed market-beating long-term results from their hedge fund investments even after discounting the recent troubles. Nonetheless, it's worth asking whether the trustees on these institutions' advisory committees are really exercising proper fiduciary responsibility. After all, it's unlikely that many of the people donating money to fund scholarships, library acquisitions, new construction projects, or faculty enrichment programs have any idea that their money is being temporarily funneled into speculative trades on Russian debt or arbitrage gambles on the relationship between the Japanese yen and the U.S. dollar. Responsible stewardship of endowment dollars involves some reasonable risk-taking, but many hedge fund investments cross that line.
It's not just that these funds select high-risk investments that many donors would consider imprudent and inappropriate for their own portfolios. Most hedge funds also increase their risks by leveraging their assets via margin loans from banks and brokerage firms. While few if any have ever carried the extraordinary leverage that LTCM managed (some reports put the ratio at 50 to 1), it's certainly not unusual for a hedge fund to borrow 40 cents on the dollar, as Everest Capital Ltd. did. Though Fools can debate how much margin is too much, little or none seems preferable, with 40% being way beyond acceptable.
I mention Everest because it offers even more reasons for concern despite the fact that it has received little media attention outside of the Journal's reporting. Consider that by early September, Everest Capital's two hedge funds had lost $1.3 billion of the $2.7 billion under management at the beginning of the year, according to an October 2 article in the Journal. The Everest Capital Frontier Fund, which is focused on emerging markets, was down a stunning 68% for the year.
Institutions feeling the pain include the endowment funds of Yale University in New Haven, Connecticut; Brown University in Providence, Rhode Island; Emory University in Atlanta, Georgia; and the University of Iowa in Iowa City. Cambridge Associates, a Boston-based investment advisor to endowments, reportedly steered $100 million into Everest. So these endowments could have lost $48 million from their Everest investments alone. How many scholarships would that cover?
Alan Swanson, VP of communications and administration for the University of Iowa Foundation told the Chronicle for Higher Education that the foundation had lost just $4.6 million from Everest, or less than 1% of the endowment's $558 million market value. Iowa is the only school endowment to offer specifics on its Everest losses.
However, Donald J. Reaves, executive VP and CFO for Brown, which has an endowment of over $1 billion, told the Chronicle, "When you're investing in an endowment, you're in for the long haul. You're not going to panic." Reaves said that Brown had been invested in Everest for the last two years. For most of that period, Everest had delivered outstanding results. The Frontier Fund, for example, was launched in 1995 and returned 43% that year, 70% in 1996, and 50% in 1997.
With that, however, the fund had peaked. The losses this year undermine this otherwise terrific track record. Consider that $1 million invested in the fund at its inception would now be worth just $1.17 million based on the Journal's numbers. That amounts to a 4.2% compound annual growth rate. The same amount invested in an S&P 500 index at the beginning of 1995 would now be worth more than $2.55 million thanks to a 27.7% compound annual growth rate, excluding this year's dividend reinvestments. While the fund's short-term performance no doubt offered a rush, Brown University would have done better if it had kept away from this hedge fund's dangerously thin air.
Similar stories probably abound, but they have only begun to be told. For more, check out the rest of this feature.
If you want to encourage an endowment fund to exercise more Foolish prudence in managing your donations, consider sending them a copy of The Motley Fool Investment Guide. The money they save may be your own. We can even include a Foolish message from you so they know whom to thank.
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-- Entire feature: Endowments Hedging Their Bets<% ' AvantGo:End %>
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