Fairfield University and Miss Porter’s School in Farmington are among 46 Connecticut academic institutions that have $56 million frozen in a short-term investment fund that abruptly restricted withdrawals to prevent a run by investors.
The $9.3 billion portfolio, known as the Short Term Fund, has 12 percent of its assets in mortgage-backed securities, instruments that have nosedived in recent weeks.
The fund was founded in 1974 by Commonfund, a Wilton-based nonprofit that serves hundreds of academic institutions nationwide. Schools routinely drew from the fund to pay day-to-day operating expenses such as payroll.
But on Sept. 29, Wachovia Corp., the fund’s trustee, told investors they would not be allowed to withdraw more than 10 percent of their assets, a cap that has since been raised to 52 percent.
The Charlotte, N.C.-based banking company is now liquidating the fund’s assets. Wachovia opted for the freeze to avoid the risk of massive withdrawals, said Keith Luke, managing director of the Commonfund.
Institutions that invested heavily in the fund may face challenges paying their bills, Luke said. “If this was the only source of liquidity for some institutions, they could experience some problems,” he added.
The list of Connecticut schools with money in the Short Term Fund has not been made public, but Luke confirmed that they collectively had $116 million invested when the withdrawal limits were announced Sept. 29. Roughly 48 percent of that sum, or $56 million, remains frozen.
Moody’s Investors Service has reviewed about 242 schools with investments in the Short Term Fund, including Fairfield University, Connecticut College, Yale University and Quinnipiac University. The report also listed three private schools in Connecticut — Choate Rosemary Hall in Wallingford, Loomis Chaffee School in Windsor, and Miss Porter’s School in Farmington — as fund investors.
A spokesman for Yale, who asked not to be identified, disputed Moody’s report. He said Yale University Press, a publishing company at the school, had a small investment in the Commonfund, but not in its Short Term Fund.
Analysts concluded that a “vast majority of colleges will successfully manage through liquidity challenges,” but, “in certain cases, rating actions may be taken due to pressure on liquidity.”
Moody’s has put two colleges on a watch list for possible downgrade: Franklin Pierce University in New Hampshire and Simmons College in Boston. There was no indication any Connecticut schools faced a downgrade.
Fairfield’s Frozen $10M
Fairfield University has about $10 million to $11 million still frozen in the Short Term Fund, said William Lucas, vice president for finance and administration and treasurer at the school.
Lucas said the school will be able to cope in the near term because it diversified its investment portfolio. But if the fund remains frozen over a longer period of time, it could cause problems for the school.
“You are always impacted by something like this,” Lucas said. “Right now, we are okay because [the Commonfund] has exceeded what they thought they would be able to pay back at this point. But if they can’t keep this up, there might be a point where it can become more problematic.”
Lucas said ideally they would like to get most of the money back by June.
If they don’t, the school would have to “look at alternative plans.”
Michael Bergin, chief financial officer at Miss Porter’s, said the school had just over $1 million in the fund when withdrawals were restricted. It has been able to get about half of it back. He said the freeze hasn’t had a major impact on operations because “we diversified a lot of our cash.” Bergin said the school remains in solid financial shape.
Timing Is ‘Contingent’
Another school, Quinnipiac University, has about $95,000 left in the Short Term Fund, but the freeze is not having a big effect, said Dan Johnson, associate vice president for finance/controller at the school. Johnson said the university uses the fund as a cash reserve for its billing cycle.
“There was a time when we parked a lot of our operating cash with the fund,” Johnson said. “Since 2002, we all but got out of the fund because the returns weren’t as attractive as we were seeing in a traditional money market account.”
Connecticut College only has about $8,000 left in the fund, said Amy Martin a spokesperson for the school. Martin said the school took out most of its money in the fund in the spring. “It really hasn’t impacted us,” Martin said.
Luke of the Commonfund said he “fully expects” schools to get all of their money back, “but timing is contingent on the market.” He said they hope to pay out 60 percent of the fund by the end of the year.
The Commonfund also restricted withdrawals from its Intermediate Term Fund, which holds $1 billion in assets for about 200 schools across the country.
As of Oct. 2, investors in that fund have access limited to about 30 percent of their money.
That withdrawal freeze isn’t expected to have as great an impact because those investors generally earmarked that money for longer-term needs, such as equipment purchases.
