The year was 2008 and Cornell was prospering. With the University safely past the halfway point in its $4 billion capital campaign and reporting double-digit returns on its endowment, top administrators were terming the era a “golden age” in higher education.

Little did Cornell — and the rest of the world — know what was in store next.

Soon after Lehmann Brothers representatives packed up their bags at the end of last year’s career fair, their employer filed for bankruptcy, beginning the painful and precipitous downfall of the investment-banking world.

Higher education was not unscathed. Ivy League schools — some of the wealthiest universities in the world — endured losses on their endowments, putting their very existence on the line. The University’s endowment was down by 26 percent at the end of the investment period, which terminated on June 30.

Cornell’s peers reported similar losses. Yale University saw a 30.4 percent loss, and Brown saw a similar 27 percent endowment loss. Over the summer, Vanity Fair gave a scathing critique of Harvard’s loss of $8 billion between July and October 2008, calling such mismanagement of funds corrupt and unhealthy.

One year later, investment offices across the Ivy League are feeling the heat as they try to restock their once overflowing coffers, made lean by last year’s market crashes. Now is the time for rebuilding, and James Walsh, chief investment officer, is at the head of the show.

The University spoke with Walsh about the last year in the investment office, and what Cornell has in store to secure a stable future.

THE SUN: Currently, the University endowment is down 26 percent for the fiscal year ending June 30, 2009: What is your office doing to build the budget back up?

JAMES WALSH: While FY09 was a very tough year for investors, it is worth noting that the Cornell endowment is still ahead by almost five percent per year over the past five-years, even after FY09’s return. Over the past year, in particular, the Investment Office has worked very closely with the Investment Committee of the Board of Trustees to position the endowment for good performance going forward but at the same time take the amount of risk that is appropriate in today’s climate. Indeed, we have seen positive returns so far this financial year, both from new investments made over the past 18 months, but also from a recovery in long-standing investments.

SUN: What has your office been doing in the past year to build up the endowment? Were the efforts successful?

J.W.: The short answer is that we are investing cautiously, cognizant that we live in uncertain times. That means we are carrying a relatively high level lower risk assets, such as cash and fixed income, and looking to build positions that protect the endowment against further financial turmoil. The endowment is already invested with top tier managers who will be, and have been, able to identify excellent investment

opportunities even in these difficult times. Indeed, over the past six-months we have seen positive performance across much of the endowment, as these and other investments start to recover. That said, it would not be prudent to take excessive risk in the current environment, and we are positioning the portfolio accordingly.

SUN: How is the University endowment performance comparing to other Universities, especially “peer” institutions?

J.W.: Cornell’s performance is within the range of the endowment universe. It is difficult to make good comparisons as the amount of risk that an endowment is taking will influence returns, and it is difficult to see through into other endowment’s portfolios. Cornell’s long term performance, which is what really matters, has been strong.

SUN: What is the ultimate goal for the University endowment?

J.W.: The ultimate goal of the endowment is to generate sufficient returns to grow the real value of the endowment while meeting annual operating budget pay-out with an annual five percent pay-out growth; this translates to a minimum return target of CPI plus five percent.)

SUN: How do the strategies used to build up the endowment compare to other Universities?

J.W.: Cornell’s asset allocation is not dissimilar to other sophisticated endowments. The endowment has a significant exposure to alternative investments and is proud to work in partnership with some of the best and most experienced investors in the business.

SUN: Are you optimistic about the endowment performance for the coming fiscal year?

J.W.: I am cautiously optimistic; we have a very strong roster of managers, which we are always looking to improve, and have an excellent Investment Office staff and great support from the Investment Committee. I am cautious about the financial markets: while the systemic crisis has been avoided, debt in the economy remains too high and the banking system still needs to improve its balance sheet.

SUN: What factors led to the large decrease in endowment?

J.W.: Weakness was experienced across almost all the markets in which we invest, whether it was U.S. equities, international equities, real estate or commodities; there really was nowhere to hide. What made the past 12-18 months unusual was also the extent to which asset classes moved in the same direction, driven by the sharp reduction in liquidity in the market, which meant there was no safe asset except for cash and fixed income.

SUN: Anything else you’d like to add?

J.W.: Only to reiterate that Cornell has a strong Investment Office staff which has worked tirelessly with the University’s Investment Committee over the past months both to navigate the endowment through some extremely challenging times, and to position the portfolio for a recovery in performance.