The Chronicle of Higher Education
By Goldie Blumenstyk
College endowments earned an average return of -3 percent for the 2008 fiscal year and an estimated -22.5 percent in the five months after that, two new reports out today show.
The declines are already having an impact. More than a quarter of all institutions said they planned to draw less money from their endowment this year than they had expected to spend.
After a half-decade of soaring returns, it was the first time endowment investments lost money since the early 2000s, when, in the wake of the collapsing technology bubble and the terrorist attacks of September 11, endowments returned a -3.6 percent in 2001 and -6 percent in 2002 (see tables).
The only category of institutions that managed to eke out an average positive return in fiscal 2008 were the 77 with endowments worth more than $1-billion. Even their return—0.6 percent—was a far cry from the 21.3 percent return they posted a year earlier.
As in the previous year, the largest endowments at the end of the fiscal year were those of Harvard ($36.6-billion), Yale ($22.9-billion), Stanford ($17.2-billion), and Princeton ($16.3-billion) Universities. All have subsequently dropped in value by about 20 percent.
The investment declines were hardly a surprise. For the last year, markets have been roiled by a global recession, a credit crisis of unprecedented proportions, and the collapse and near-collapse of several major international banks.
"Things went south just as quickly in the endowment world as they did in the economy," said John Walda, president of the National Association of College and University Business Officers, the organization that conducted the annual survey with TIAA-CREF Asset Management.
For both the fiscal year and the five months that followed, colleges’ returns were better than many of the market-performance indices. The Standard & Poor’s 500 stock index returned a -13.1 percent for the fiscal year; from July 1 to November 30, the S&P fell by 29.9 percent.
Surprising Results
Despite the troubled economy and volatile markets, the 36th annual "Nacubo Endowment Study" found that more than half of all endowments ended their fiscal year in June with larger endowments than they had a year earlier, with an average increase of 0.5 percent. Fifty-five institutions reported overall endowment growth of greater than 10 percent.
The biggest endowment to see a sizable percentage gain was that of Oklahoma State University and its foundation, which grew by nearly 32 percent, bringing the endowment to $617-million at the end of fiscal year. Foundation officials said the gain was propelled by a positive investment return of 4.5 percent and the success of an April-though-June push for endowment gifts to match challenges from the state and a private donor, which brought in $65-million.
The survey included responses from 796 institutions from the United States and Canada. (The accompanying database of changes in endowment value lists 791 institutions because a few university-related foundations respond separately but report their data with the institution.)
Because of the abrupt downturn in the markets since the summer, Nacubo and its new endowment-study partner, the Commonfund Institute, conducted a follow-up study on endowment performance in December. That survey, which included responses from 435 of the survey respondents, found that endowments had fallen in overall value by an estimated average of 22.9 percent. (At least five of the largest 10 endowments did not respond.)
In dollars, that translates to an estimated decline of $94.5-billion in market value for the institutions in the annual survey.
The findings in the follow-up study reflect the two-pronged problem colleges face. Negative returns are eating into endowment values, and philanthropy hasn't been adequate to make up for the losses and endowment spending. After the markets dove, "gifts did not help to hold those values up," said John S. Griswold Jr. executive director of the institute.
Large private colleges depend on their endowment income to cover 15 to 20 percent of their operating costs, and at some of the wealthiest institutions, it provides as much as 45 percent.
(On Tuesday the institute also released its "2009 Commonfund Benchmarks Study of Educational Endowments," which found that 628 schools and colleges earned -2.7 percent on their endowment investments in the 2008 fiscal year. The study included results from 470 colleges and universities, but it does not provide data or analysis separately for each college respondent.)
Spending Plans
With markets not expected to recover quickly, many colleges are taking a cautious spending approach. Faced with substantially smaller endowments, fewer than 4 percent of respondents said they plan to increase the rate of spending from their endowment next year. (Among institutions with endowments greater than $500-million, the proportion was slightly higher, at 7.5 percent.) More than a third of respondents said they still didn't know what they would do or did not respond.
In 2008 the average rate of spending from endowments was 4.6 percent, the same as it was in 2007. The rate of spending is determined by dividing the amount of endowment money spent into the value of the endowment at the beginning of the year. Over the past 18 months, several state and Congressional leaders have criticized wealthy colleges for failing to spend at least 5 percent of their endowment value each year.
One of the most vocal of those critics, U.S. Sen. Charles E. Grassley, a Republican from Iowa, reiterated that message with a written statement timed for release with the reports. “I hope colleges won’t use the recent volatility as an excuse to raise tuition or freeze student aid,” he said. “Colleges’ smart saving and investing could really help students right now. And the right kind of modest payout requirement for endowments above a certain dollar amount might do a lot of good for universities and students regardless of economic conditions.”
Kevin P. Hegarty, chief financial officer at the University of Texas at Austin, said it was disappointing to see some colleges decide to avoid tapping deeper into their endowments now, as they face financial squeezes from declines in state financing and private giving, and increasing demand for student aid.
"Wasn't that the argument for payouts less than the returns" when the gains were stronger? he asked. Austin, part of the giant University of Texas system, which has the fifth-largest endowment in the country ($16.1-billion), plans to increase spending from its share of the endowment by the rate of inflation next year.
Mr. Walda said he sympathized with college trustees and other leaders who are now walking the "tightrope" in deciding how to respond to the severe drop in endowment values. "I'm not surprised that 35 percent just don't know at this point," he said.
Still, as he noted, endowments are designed to be long-term investments, and if you look back over the past decade, "it's still a very positive picture."
For the 10 years ending June 30, 2008, colleges' overall return was a positive 6.5 percent.
Investment Strategies
The diversification that colleges have been pursuing over the past several years has helped them, Mr. Walda and others said.
That trend continued in 2008.
Between the ends of fiscal 2007 and 2008, the proportion of all college endowment assets invested in "alternatives"—private equity, venture capital, hedge funds, real estate, and natural resources—rose from 18.9 percent to 23.5 percent. The proportion of assets invested in stocks fell from 57.6 percent to 51.9 percent.
For some colleges, which have increasingly been shifting assets away from bread-and-butter investments like stock and bonds, and into alternative investments, like hedge funds and natural resources, the worst may yet be to come.
Over the next few months, many credit-squeezed hedge funds and private-equity funds may be calling on investors to fulfill their investment pledges, which could force some colleges into selling other assets at a loss to come up with the money. And colleges that managed to cushion their overall losses in 2008 by investing in oil and natural gas could find themselves with deep losses, if plummeting prices don't recover.
"Everyone is realizing that they need more liquidity than they thought they did," said Kathryn J. Crecelius, chief investment officer at the Johns Hopkins University.
Johns Hopkins had a return of -1.3 percent for 2008, and declines in line with its peers in the months that followed. Between 2007 and 2008, the overall endowment sank in value by nearly 10 percent, to $2.5-billion, but Ms. Crecelius said most of that was attributable to a decision to remove funds the university had been counting as endowment that should not have been classified that way.
Despite the negative return, Ms. Crecelius said, Johns Hopkins is in "a very good position compared to many of our peers" because it has the capital it needs to cover its commitments. Also, it relies on its endowment for only about 5 percent of its operating costs.
By contrast, institutions like Dartmouth College and Harvard, which depend on endowment funds by as much as seven times that, have recently imposed hiring freezes and spending cuts. Dartmouth, which had already announced it won't fill all 70 positions left vacant by its retirement-incentive program, last week said that "some staff layoffs are inevitable" because of the endowment declines. Like many other institutions that pledged last year to increase financial aid, Dartmouth said it planned to maintain that program.
Beating the Market
While few institutions have managed to find market-beating investment strategies for the past several months, some who beat the averages in fiscal 2008 credited their contrarian tactics. For Texas Christian University, that meant beefing up holdings in oil and gas and cutting back on investments in stocks, particularly in stocks of companies in emerging markets (which ended up doing badly), even though for years at investment conferences, "everybody's just thumping the table about international equities," said James R. Hille, chief investment officer.
The result: Texas Christian notched a positive return of 5 percent for 2008. With energy investments accounting for 15 percent of the university's portfolio (much above the average allocation of 2.2 percent), the endowment benefited when prices surged, "Although," Mr. Hille noted, "we're going to pay for that this year."
Christopher L. Bittman, chief investment officer at the University of Colorado Foundation, followed a similar strategy, selling emerging-market stocks and loading up on bonds during the past 18 months. For a while, he said, "we looked pretty foolish," especially when international stocks "screamed ahead." But he said the positions, including an allocation to bonds that has gone from about 5 percent to about 13 percent, seems appropriate now.
Lately, he's been eyeing the kinds of investments that have been battered by the markets, including real estate, high-paying debt issued by companies in financial trouble, and shares of private-equity funds that some cash-strapped investors are unloading at bargain-basement prices.
He's even put a portion of the foundation's endowment into a cattle and sheep farm in Australia. Markets are in turmoil and the foundation, which notched a 1 percent return in 2008, is down notably since then. While few investment experts are predicting a market rally any time soon, Mr. Bittman said he sees cause for optimism. "Honestly, I think there are some opportunities in this mess."
0 comments:
Post a Comment