Colleges earned an average of 17.2 percent on their endowments in the 2007 fiscal year, impressive returns that could prove to be an important financial cushion against a possible recession.
But the financial success also increased political pressure on colleges to spend more of their riches to reduce tuition and other college costs.
The overall return for the fiscal year that ended June 30 was the highest in nearly a decade, according to the annual report released last week by the National Association of College and University Business Officers in conjunction with TIAA-CREF Asset Management.
In the months since the end of the fiscal year, some colleges have reported a falloff in earnings because of losses in funds holding subprime mortgages and other faltering investments. Wellesley College, for example, had a return of more than 22 percent in the 2007 fiscal year but recently reported that its return from July to the end of November was only 3 percent.
With the downturn in the economy and the growing volatility of worldwide markets, colleges are unlikely to see a repeat of high earnings in 2008, said Scott C. Malpass, vice president and chief investment officer at the University of Notre Dame. “Clearly it’s a tougher year.”
In 2007, Notre Dame’s 27-percent return — reportedly second among the largest funds only to Yale University’s 28-percent gain — helped to bring the endowment to just under $6-billion by mid-2007. Mr. Malpass said Notre Dame had not lost any endowment value since June because the endowment, like many others, was sufficiently hedged and diversified, so that downturns in one asset were offset by gains in others.
Even smaller endowments are diversified these days. According to the latest survey, based on data from 785 institutions, endowments of $25-million to $100-million in value had nearly 40 percent of their assets in investments other than stocks.
Taking the Long View
Although markets have been volatile, Brett Hammond, chief investment strategist at TIAA-CREF, said endowments were in no immediate danger because they plan for ups and downs. “Endowments take the long view,” he noted. “That’s why they don’t spend all their money in the good times.”
While the one-year return matters, Mr. Hammond said, the more significant figure takes into account endowment returns over the longer term. Colleges’ average return for the past 10 years was 8.6 percent, a figure that is in line with the benchmark most colleges aim for.
Nonetheless, the one-year returns, coupled with another strong year of philanthropy, swelled the ranks of billion-dollar endowments in North America to 76, as of June 30, including two in Canada. That is 14 more than in the 2006 fiscal year.
The wealthiest colleges did better than the average: Colleges with endowments of $1-billion or more earned 21.3 percent, and those with endowments valued at $501-million to $1-billion earned 19.3 percent.
Nacubo does not make public the investment returns for individual colleges, but it does report the year-to-year changes in their endowments’ values, which are determined by endowment earnings, gifts, and the rate of spending. Many colleges, however, do report their earnings separately.
Spending Rates in the Spotlight
In 2007 the average rate of spending from endowments over all was 4.6 percent, a slight decline from the 4.7-percent rate the previous year. For colleges with endowments greater than $500-million, the rate was 4.4 percent. The rate represents the amount of money spent for capital and operating needs as a percentage of the value of the endowment at the start of the fiscal year.
Some members of Congress and others have argued that wealthy colleges should spend more of their endowments to contain tuition costs and justify their tax-exempt status. After the survey was released, Sen. Max Baucus, of Montana Democrat, and Sen. Charles E. Grassley, of Iowa, the top Democrat and Republican, respectively, on the Senate Finance Committee, sent a letter to each of the 136 U.S. colleges with endowments of at least $500-million, asking a series of questions about how they spend their endowments and set their tuitions, among other topics.
“Tuition has gone up, college presidents’ salaries have gone up, and endowments continue to go up and up. We need to start seeing tuition relief for families go up just as fast,” Senator Grassley wrote in a prepared statement.
The increased political pressure on college endowments comes in the wake of five years of robust returns, though some believe the weakening economy maytake some of the wind out of the critics.
“That focus on the runup may be looking backward in the mirror rather than looking forward,” said Barry Mills, president of Bowdoin College. “I don’t believe in building business models off of what may have been one very good year.”
Bowdoin had a return of 24.4 percent in 2007, helping bring its endowment value to $827.7-million. Its spending rate was just under 4 percent, officials there said.
Concentration at the Top
The combined assets of the 785 institutions in the latest survey totaled $411.2-billion. That’s about 20 percent more than the value of the assets reported by 765 institutions in the survey a year ago.
But much of that wealth remains concentrated at the very top of the higher-education food chain. The five biggest endowments — those of Harvard, Yale, Stanford, and Princeton Universities, and the University of Texas system — own nearly one-quarter of all that wealth.
Mr. Hammond, of TIAA-CREF, said the biggest endowments had the strongest returns because their endowments continue to be the most diversified and sophisticated, with higher-than-average proportions of their funds allocated to asset classes like international stocks, private-equity funds, and natural resources. International equities were the highest-performing asset class for endowments in 2007, returning an average of 28 percent. Private equity returned 19.8 percent. Domestic stocks also performed well, returning 19.3 percent.
But that was then. Since June, markets have dropped about 15 percent.
“Equities have gone from being a huge driver of asset growth to a huge drag,” Mr. Hammond said in an interview last week.
John Walda, president of Nacubo, said the market activity of the last few months, and predictions about flat or falling appropriations from states in support of public colleges, demonstrated the importance of endowment performance. Even though the rate of endowment spending declined, because the value of endowments rose, “the actual dollars going out [of endowments and into college budgets] certainly are increasing,” he said.
Among endowments valued at more than $1-billion, only one institution, the University of Cincinnati, showed an increase in its endowment value of less than 10 percent. Greg Hand, a spokesman for Cincinnati, said the endowment had earned a return of 15.8 percent but showed an overall increase of just 7.7 percent because the university had increased its spending from the endowment and had removed $40-million that had been temporarily parked in the endowment as part of a broader restructuring of the budget.
International Strategies
For many other endowments, large and small, an emphasis on international investments proved to be one of the winning strategies. That was true for Notre Dame, which has more than 40 percent of its endowment in non-American investments, as well as for smaller endowments like those of Dartmouth College and the foundations of the Universities of Arkansas and Maine.
At Notre Dame, investments in companies in emerging markets produced returns “north of 45 percent,” said Mr. Malpass. For Maine, the international fund was the top performer, with a return of 34 percent.
Emerging-market investments were also the top-performing assets for Dartmouth, returning 46 percent. Dartmouth had about 6 percent of its $3.8-billion endowment in that asset class. “We’ve been concerned about the dollar for quite a while,” said David H. Russ, chief investment officer. Dartmouth’s overall return was 24.3 percent.
The University of Arkansas, which has been developing a much more sophisticated endowment since 2002, when heirs of the Wal-Mart founders pledged $300-million, has been pursuing a similar strategy. (The donation, which benefits the Fayetteville campus, was contingent on the institution’s matching the gift, which it did in 2005.)
From 2006 to 2007, the Arkansas foundation cut its exposure to domestic equities from 45 percent to 31 percent, and put more of its money into international stocks, private equity, and hedge funds. The endowment as a whole earned a return of 19.9 percent in 2007. As of June 30, the university endowment stood at more than $876-million, with the initial $300-million gift having grown in value to $495-million.
Colorado College, with an endowment valued at $523.2-million, is also eagerly pursuing a broader portfolio. In 2007 its endowment return of 17.3 percent fell below the average for comparably sized endowments, but Stacy Lutz Davidson, director of investments, said she expected that would improve now that the endowment has begun to catch up with its peers and pursue more diversification.
Up until about 18 months ago, the endowment held about 90 percent of its assets in domestic stocks and bonds. Today only 65 percent of the endowment is invested in those assets. The college now uses 18 investment managers, rather than five, and it has shifted a notable portion of its endowment into real estate and private equity, including investments in companies in developing nations.
Over the past year, a number of the most wealthy institutions, including Dartmouth, Princeton, Stanford, and Yale, have announced that they will be increasing their spending rates. Dartmouth, for example, said it would raise its rate to 6 percent, and last week it announced it would use some of that additional money to help finance a loan-free education for more of its middle-income students.
“We really thought we were under-distributing” money from the endowment, given the more sophisticated investment strategies that have become available to the institution as its value has increased, said Adam M. Keller, Dartmouth’s executive vice president for finance and administration.
The letter from Senators Baucus and Grassley said such moves are encouraging, but they wanted to see colleges potentially spend even more to help low-income students.
Bowdoin has just announced a new no-loan program too, but Mr. Mills, the president, said the college expected to pay for the 16-percent increase in student-aid spending by raising more donations for aid and by building endowment wealth through strong returns and by prudent spending that does not involve raising the spending rate.
He said Yale’s decision to back its new no-loan program by guaranteeing to never spend less than 5.5 percent of its endowment was praiseworthy but not easily replicable, even for institutions like his that rank among the 100 wealthiest. (Bowdoin is 90th.) Yale’s $22.5-billion endowment is more than 27 times as large as Bowdoin’s.
Speaking of Yale’s pledge, Mr. Mills said: “I’m inspired by it, but I can’t afford it.”
And with markets likely to remain jittery, many other colleges may also be thinking less about their several years of good investment returns, and worrying more about their economic futures.
PERFORMANCE OF COLLEGE ENDOWMENTS Average returns, 1997-2007 | 1997 | | | 1998 | | | 1999 | | | 2000 | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2007 average returns | Endowments by size | Over $1-billion | +21.3% | $501-million to $1-billion | +19.3% | $101-million to $500-million | +18.0% | $51-million to $100-million | +16.7% | $26-million to $50-million | +15.9% | $25-million or less | +14.1% | All | +17.2% | Comparative measurements | Russell 3000 | +20.1% | Standard & Poor’s 500 Index | +20.6% | Morgan Stanley Capital International World Ex-US Index | +27.1% | Lehman Brothers Aggregate Bond Index | +6.1% | Consumer Price Index | +2.7% | Higher Education Price Index | +3.4% | NOTE: The figures represent total-return rates — including changes in market value plus dividend and interest — for the year ending June 30, 2007, based on data from 785 college investment pools. | How the assets were invested in 2007 | Stocks | 57.6% | Domestic | 39.6% | International | 18.0% | Bonds | 18.6% | Alternative assets | 15.4% | Hedge funds | 10.6% | Private equity | 2.3% | Natural resources | 1.6% | Venture capital | 0.9% | Cash | 3.5% | Real estate | 3.5% | Other | 1.4% | Trends in average annual spending rates of college endowments | By endowment size | Over $1-billion | 4.4% | 4.5% | 4.8% | 5.2% | 5.3% | 4.8% | 4.1% | 4.2% | 4.1% | 4.2% | $501-million to $1-billion | 4.4% | 4.5% | 4.7% | 5.0% | 5.2% | 5.0% | 4.6% | 4.5% | 4.3% | 4.5% | $101-million to $500-million | 4.6% | 4.6% | 4.7% | 5.0% | 5.2% | 5.1% | 4.8% | 4.6% | 4.4% | 4.5% | $51-million to $100-million | 4.8% | 4.7% | 4.8% | 4.9% | 5.3% | 5.3% | 5.3% | 5.1% | 5.1% | 5.2% | $26-million to $50-million | 4.8% | 4.7% | 4.7% | 4.7% | 4.9% | 4.9% | 4.9% | 4.6% | 4.4% | 4.4% | $25-million or less | 4.6% | 4.7% | 4.7% | 4.5% | 4.8% | 5.2% | 5.0% | 4.8% | 4.6% | 5.5% | By type of institution | Public | 4.5% | 4.5% | 4.5% | 4.5% | 4.9% | 4.8% | 4.8% | 4.6% | 4.6% | 4.9% | Private | 4.7% | 4.7% | 4.8% | 5.1% | 5.2% | 5.2% | 4.9% | 4.7% | 4.5% | 4.6% | All | 4.6% | 4.7% | 4.7% | 4.9% | 5.1% | 5.1% | 4.8% | 4.7% | 4.5% | 4.7% | NOTE: Figures cover fiscal years and reflect revisions made by institutions | SOURCE: National Association of College and University Business Officers | |
http://chronicle.com Section: Money & Management Volume 54, Issue 21, Page A1