part two of two part series exploring GW’s 1.1 billion endowment

While financial markets around the world tumbled earlier this year, the University’s $1.1 billion endowment managed to maintain strong growth, Chief Investment Officer Don Lindsey said.

Although the endowment sustained losses in July and August, the University earned back its losses, and more, in September, Lindsey said. October returns were not yet available, but he said that it had been another strong month due to the University’s changing investment strategy.

“We’ve been focusing on real assets,” Lindsey said. “We really believe that that’s where the big opportunities are going to be for the rest of this decade.”

He said the fund has started to expand its holdings in natural resources abroad, including agribusiness in Australia, Latin America and the United States and mining in China.

“We’re very diversified both geographically and across different investment strategies,” he said.

Through the end of September, University assets had grown by more than 14 percent for 2007.

Lindsey said the losses this summer were the result of a widespread sell-off in the financial market triggered by losses in sub-prime mortgages.

Sub-prime mortgages are high-risk mortgages typically offered to borrowers with poor credit ratings. These mortgages have grown into a $600 billion a year industry, accounting for about a fifth of the home loan market in the United States. More than two-dozen mortgage brokers have already collapsed as a result of the sub-prime mortgage financial crisis, which began late in 2006.

The crisis was the result of investment strategies that used short-term debt buying strategies that promised a higher return than the interest that was paid out.

In recent years, sub-prime mortgages were added to these debt packages, making them more attractive by allowing them to pay much higher yields. Despite that added risk, much of this debt initially received the highest possible ratings from credit agencies such as Moody’s and Standard and Poor.

When those investments began failing, investors were forced to find ways to pay off their own debts, he said. That triggered a sell off across the market, as funds scrambled to pay off their debts.

Alan Hess, a professor of finance at the University of Washington, said investors did not understand the risks of holding short-term debt to fund investments.

“These are new products,” said Hess, referring to the sub-prime backed debt. “The market didn’t really know how to price them or rate them.”

Among the losers, Merrill Lynch has easily taken the biggest hit, writing off more than $8 billion in losses already. It recently cost CEO Stan O’Neal his job. A number of other major investment banks such as Citigroup and Bear Stearns have lost more than $15 billion between them.

In early August, Sowood Capital Management, a small hedge fund, collapsed as a result of the crisis. One of its biggest investors was the was the endowment of Harvard University, which lost $350 million in the process.

During the crisis, GW’s endowment was ahead of the curve.

“We weren’t investing in it,” Lindsey said. “We had zero, none, nothing, in sub-prime.”

Some university endowments have already latched onto these investments. In June, Wake Forest’s endowment put a $25 million bet on the sub-prime market, while Vanderbilt earmarked $50 million of its endowed funds for the sector.

Lindsey said it is “not a smart strategy at all.”

In the long run, Lindsey remains confident in the University’s investment strategy.

“There is no question that the debt problems and particularly the problems in the residential housing market are going to slow down growth in the United States substantially,” he said.