Slight Rebound for Endowments

Preliminary study suggests that after steep drop in last half of 2008, college investments edged upward in first half of 2009. Overall decline in rate of return -- 19 percent -- would be biggest in 35 years.
December 10, 2009

Shhh -- don't say it too loud, because you might jinx it. But early indications from a survey released today suggest that after a brutal 2008, college endowments began to rebound in the first part of this year.

That's one of the apparent findings from a preliminary version of the survey of institutional endowments conducted this year by the National Association of College and University Business Officers and Commonfund (the two groups this year merged surveys they used to conduct separately). The two organizations' formal survey won't be released until January, but given the widespread curiosity/paranoia about colleges' economic situations, they opted to issue an early version based on 504 of a total of more than 800 expected institutional responses.

The preliminary survey finds that the 504 funds saw their rate of return fall by 19 percent in the 2009 fiscal year. That would normally be nothing to cheer about -- in fact, NACUBO officials confirmed that the previous high drop since the organization started tracking endowments in 1974 was -11.4 percent that year.

But an interim study the groups released in January based on the first five months of the fiscal year (July-November 2008) revealed a 22.3 percent drop at that point. So the survey released Wednesday -- assuming its findings hold up when all colleges report next January -- suggests that the endowments benefited from a slight upturn in the months between November 2008 and the fiscal year's end in June.

Because of its preliminary nature, the NACUBO-Commonfund survey contains far less detail than the normal annual report on the data -- most notably, it lacks the college-by-college listing of annual endowment values that shows, among other things, just how much more money Harvard University has than everyone else. But the report provides some broader national context for the downbeat reports that some of the country's wealthiest universities have made about their endowments in recent months, with places such as Harvard (-27.9 percent), Princeton (-23.7 percent) and Stanford (-26.7 percent) reporting major declines.

The fact that the overall average for the 500-plus colleges in the NACUBO-Commonfund early peek is significantly lower than those high-profile universities suggests that the investments of smaller institutions -- which typically invest more cautiously -- fared better in the downturn than did the behemoths. Still, negative returns even in the teens are much bigger than many colleges are used to, as the -19 percent decline would represent the biggest drop for college investments since the 1970s.

Other data in the preliminary report from the two groups reveal signs that institutions had made relatively few major changes in their strategies and behavior because of their endowment declines, at least as of the June 30 end of the fiscal year.

The colleges reporting early to NACUBO and Commonfund said they had spent from their endowments at a rate of 4.3 percent, unchanged from 2008, suggesting that they have generally filled budget gaps in other ways. One of those ways appears to have been by taking on more debt: The colleges reported a median debt level in 2009 of $43.3 million, up sharply from the $28.3 million figure they reported to Commonfund in fiscal year 2008.

Matthew Hamill, senior vice president of advocacy and issue analysis at NACUBO, said that the higher debt figure probably reflected both "increased borrowing for liquidity purposes" and colleges' "pulling the trigger" on borrowing for construction and other purposes early in the 2009 fiscal year as they saw the credit markets begin to seize up. "They were in all likelihood borrowing when they still could," Hamill said.

One other figure in the 2009 report -- showing 51 percent of colleges' endowment assets to be in "alternative" categories such as private equity, hedge funds, venture capital and other normally higher-return (but higher risk) areas -- perplexed higher ed finance experts a bit. That figure had been growing steadily in recent years, and wealthier institutions have been leading the way in such investing, said John Nelson, a managing director at Moody's Investors Service.

But the NACUBO/Commonfund figure, which the organizations said was not weighted to count the investments of the wealthier institutions more heavily, "seems quite high when you're talking about 500 institutions," Nelson said. He and other investment analysts have predicted that colleges and other nonprofit organizations would slowly abandon some of the riskier investment vehicles that came into vogue across higher education in the last decade to emphasize liquidity.

That may still be happening, but just may not have been reflected in the survey's June 30, 2009 numbers because many of those alternative investments require long-term commitments that may take time to walk away from, Nelson said. The public stock markets have also rebounded faster than many other types of investments, drawing in more colleges and other entities.

"If you took a look at that snapshot now, it might be more like 45 percent at this point," he said.


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