As federal aid dries up; Colleges try riskier investments

With their costs increasing and federal aid decreasing, many hard-pressed US colleges are aggressively looking for ways to milk bigger investment returns from their endowment funds.

As a result, schools are putting more money into stocks of smaller companies, into real estate deals, and into new ventures not listed on any stock exchange. Other popular tactics include selling stock options and lending securities. Universities traditionally have been conservative investors, putting the bulk of their funds in stocks and bonds issued by large companies.

''College and university trustees are looking much more aggressively at their options to try to maximize returns,'' notes Richard T. Ingram, executive vice-president of the Association of Governing Boards of Universities and Colleges.

Critics of the more aggressive approach contend schools may be taking unwise risks. While institutions with massive endowments may be able to afford some riskier ventures, ''Smaller institutions with some endowment, but not an enormous pool, . . . are making a mistake'' getting into more speculative investments, says Mary J. Wilson, vice-president of David L. Babson & Co., a Boston firm that manages university endowments. ''They risk losing something very important.''

More aggressive endowment managers counter that traditional investment vehicles also can be risky. A well-managed venture-capital investment, for example, is ''not any more risky than some of the public-market activity'' in stocks and bonds, says Phillip Horsely, University of Rochester investment vice-president.

University financial managers admit that there are risks in their new course, but they say these risks are manageable. ''You could go overboard,'' says David J. Lyons, vice-president of The Rockefeller University in New York. ''We are always plotting the beta (risk) factor,'' to avoid unnecessary danger. The Rockefeller University has been increasing the share of its endowment going into the 5500 Fund Inc., a partnership that invests in volatile small stocks. Rockefeller also has increased the share of its portfolio going into new ventures.

Other universities are seeking higher returns through an even wider range of investments. For example, Case Western Reserve University in Cleveland now has about 5 percent of its $138 million endowment at work in venture-capital projects, real estate, a fund that invests in fast-growing small companies in the university's region, and the arbitrage arm of a brokerage firm. (Arbitrage is the simultaneous purchase of securities in one market and their sale at a higher price in another market.) Another 4 percent of the endowment is targeted for buying investments that suddenly become attractive.

Case is ''taking a bolder approach'' to investment, a spokesman says.

University financial executives say they are paying more attention to new investment areas because of the positive results they produce. For example, the Univesity of Rochester has had ''good rates of return'' on its venture-capital investments, notes Mr. Horsely, the investment vice-president. So a year ago the institution set up a separate venture capital arm. One recent investment: a franchise of Pizza Time Theatre. Pizza Time outlets combine a fast-food restauarant and a video-game arcade.

Ronald Rayevich, Columbia University vice-president for investments, says the institution ''has made handsome profits'' from writing covered call options. A ''call'' is an option to purchase a certain stock at a specific price within a specified time. The danger in writing such an option is that a stock will be called away as it rises in price. Mr. Rayevich says Columbia ''did not have any call options out'' when the recent market rise began.

Of course, not all schools are moving toward more adventurous investments. ''We are not in the position of investing in riskier securities,'' says Fred Silander, vice-president and treasurer of DePauw University in Greencastle, Ind. DePauw's $26.5 million endowment is ''fairly evenly'' divided between stocks and bonds, he says.

Caution on the part of trustees is one reason many schools have not become more aggressive investors. ''People are much more conservative with organizational resources than with their own personal funds,'' says Mr. Ingram of the associtaion of governing boards.

And some schools are still smarting over losses incurred in the stock market's ''go-go'' era in the 1960s and '70s. ''Many came to grief then,'' notes James S. White, David L. Babson & Co. senior vice-president.

One way of minimizing the risk of more adventuresome investments is to act jointly. For example, Columbia, Cornell, Stanford, and Yale, among others, have jointly invested in a commerical real estate partnership run by Chicago's JMB Realty Trust. The partnership, now worth around $50 million, is designed to provide diversification in geography and property. ''We concluded that while none of us could do it that well alone, we certainly could do it'' acting toegther, Columbia's Mr. Rayevich says.

Whether or not they are investing in new areas, college-endowment managers say they take a long-range view of the stock market. As a result, they have not made major changes in the composition of their portfolios since the recent run-up in stock prices. ''We don't operate on that basis. We try to keep our heads,'' says Mr. Horsely, the University of Rochester executive.