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Jan. 22, 2007

The Rich on the Rise in Endowments

College endowments rose for the vast majority of institutions in the 2006 fiscal year, with an average rate of return of 10.7 percent, according to data released today by the National Association of College and University Business Officers. The data come from 765 institutions in the United States and Canada. Only 14 colleges saw their endowments shrink.

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Harvard University’s endowment, by far the biggest in higher education, grew more than any other and now totals $28.9 billion. Just the increase alone in Harvard’s endowment ($3.4 billion) is greater than the combined total endowments of the bottom 188 institutions detailed in the report.

This year’s returns represented the fourth straight average increase for college endowments, and were up slightly from the average gain of 9.3 percent in 2005. But Jessica Shedd, director of research and policy analysis at NACUBO, said that it was difficult to pick out a particular reason for the yields. Instead, she said that endowment watchers should focus on trends that have continued for the last 10 years.

“One thing that stands out is the continued move to alternative investments,” she said. Shedd explained that universities, especially those with large endowments, are moving away from traditional investments in stocks and bonds and putting more of their money in hedge funds and natural resources.

Over all, institutions still place around 78 percent of their investments in stocks and bonds, but the proportion of assets in alternative investments has more than tripled over the last decade, from 5.4 percent in fiscal year 2007 to 17.3 percent of portfolio worth in 2006.

“The larger endowments have led the charge, but now you see smaller institutions following suit,” she said.

By far the most popular of these alternative investments are hedge funds, which represent 22 percent of the investment portfolio for endowments worth more than $1 billion. In contrast, smaller endowments of less than $25 million invested just 2.6 percent of their assets into hedge funds.

Shedd said that hedge funds require more attention and high initial buy-ins, so they are better suited for institutions with large endowments and investment staff with time and expertise to manage the money.

A couple of institutions stood out. The Massachusetts Institute of Technology posted significantly large returns, with a percentage increase in assets of 24.7 percent. Financial officers at the institution declined to comment on MIT’s endowment, but a press release from last October stated that the results came from strong investment performance and gifts. Investments were spread across a diverse portfolio of real estate, real assets, private equity and international equities. Strong performance over the last 10 years has allowed MIT to more than triple its spending from the endowment.

Emory University posted better returns this year than last, when the endowment fell by 3.5 percent. This year, Emory’s endowment grew by 11.3 percent, to a balance of $4.9 billion. One factor in last year’s dismal returns was poor performance by Coca-Cola, which is based in Atlanta. Emory has benefited greatly over the years from benefactors who have donated Coke stocks, driving the university’s growth, but the stock’s slippage in recent years has taken its toll.

Mary Cahill, chief investment officer for Emory, shied away from commenting on the performance of Coke’s stocks and how that has affected the endowment. Instead, she said, “Our portfolio is fully diversified.” She added that Emory has benefited from high performing investments in energy, international equities and real estate.

Following are several tables that show some of the highlights of the NACUBO survey:

Top 20 Endowments

Rank

Institution

2006 Endowment Value (000s)

1-Year % Change

1.

Harvard U.

$28,915,706

13.5%

2.

Yale U.

$18,030,600

18.4%

3.

Stanford U.

$14,084,676

15.4%

4.

U. of Texas System

$13,234,848

14.0%

5.

Princeton U.

$13,044,900

16.4%

6.

Mass. Inst. of Technology

$8,368,066

24.7%

7.

Columbia U.

$5,937,814

14.4%

8.

U. of California

$5,733,621

9.8%

9.

U. of Michigan

$5,652,262

14.6%

10.

Texas A&M U.

$5,642,978

13.7%

11.

U. of Pennsylvania

$5,313,268

21.6%

12.

Northwestern U.

$5,140,668

22.0%

13.

Emory U.

$4,870,019

11.3%

14.

U. of Chicago

$4,867,003

17.6%

15.

Washington U.

$4,684,737

9.8%

16.

Duke U.

$4,497,718

17.6%

17.

U. of Notre Dame

$4,436,624

21.5%

18.

Cornell U.

$4,321,199

14.4%

19.

Rice U.

$3,986,664

10.4%

20.

U. of Virginia

$3,618,172

12.4%

Top 10 Public Universities

Rank

Institution

2006 Endowment Value (000s)

1-Year % Change

4.

U. of Texas

$13,234,848

14.0%

8.

U. of California

$5,733,621

9.8%

9.

U. of Michigan

$5,652,262

14.6%

20.

U. of Virginia

$3,618,172

12.4%

25.

U. of Minnesota

$2,224,308

13.0%

27.

Ohio State U.

$1,996,839

15.7%

28.

U. of Pittsburgh

$1,802,859

17.8%

29.

U. of Washington

$1,794,370

20.4%

34.

Purdue U.

$1,493,554

11.4%

Top 5 Liberal Arts Colleges

Rank

Institution

2006 Endowment Value (000s)

1-Year % Change

36.

Grinnell College

$1,471,804

5.8%

37.

Williams College

$1,462,131

8.4%

38.

Pomona College

$1,457,213

12.2%

42.

Wellesley College

$1,412,410

10.7%

43.

U. of Richmond

$1,387,834

14.9%

Top 5 Community Colleges

Rank

Institution

2006 Endowment Value (000s)

1-Year % Change

458.

Valencia CC (Fla.)

$55,968

5.9%

608.

Harrisburg Area CC (Pa.)

$27,637

5.5%

630.

Florida CC Jacksonville

$24,229

27.9%

634.

Sinclair CC (Ohio)

$23,605

14.1%

653.

Kentucky Community/
Technical C System

$21,212

8.8%

— Paul D. Thacker

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Comments

By following the link in the article to the NACUBO website, one can get to a table listing the results for 765 institutions.

At the top of this table is the following clarification: “Percent Change does NOT represent the rate of return on investment for the listed endowment. This figure represnts an endowment’s change in market value between fiscal year-end 2005 and fiscal year-end 2006. Factors such as growth from gifts, reductions due to expenditures and withdrawals, and investment returns determine an endowment’s year-end market value.”

(This article is correct in referring to increase in value rather than return on investment but I feel this is a point worth emphasizing.)

math prof, at 7:55 am EST on January 22, 2007

Changes in Endowments

The above comment is correct; we’re talking change in endowment worth — which could be caused by multiple factors. Another thing to consider is that endowments can grow if they are not being spent on things like tuition or building, or whatever.

So if they had used a value such as “net increase” that might give you a better senseo of the money an institution took in over a fiscal year.

Paul D. Thacker, Reporter at at Inside Higher Ed, at 10:00 am EST on January 22, 2007

What are colleges saving for?

Wouldn’t a better measure of endowment worth be output rather than income? Shouldn’t we be more concerned with how an endowment is used rather than its ability to last into perpetuity? What is the point of saving up all this money if more of it is not going to be used for educational purposes?

SRK, at 11:01 am EST on January 22, 2007

Colleges are Saving to Survive

SRK’s comments couldn’t be further off the mark. Spending from endowment must be managed prudently by the institution. The point of endowment is to provide enough of an asset base to allow that some costs can be picked up by something else beside tuition—hopefully forever. The only prayer that an institution has to become less tuition-reliant is its endowment. Institutions exist for the long haul. If “more” is used currently, then less is available for later. Play that out to completion and the institution has no endowment. Play THAT out and the institution closes. Would that outcome satisfy anybody?

JG, at 4:45 pm EST on January 22, 2007

A balance

Investment and spending policies must be established together. If the goal is intergenerational equity (current and future generations of students benefit equally through reduced tuition) then average spending must equal average real investment returns.

Hank Freeman, at 10:10 am EST on January 29, 2007

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