The Little Engines That Couldn't

January 28, 2010

In a twist on the old tale, the tortoise has won a sprint and the hare is leading the marathon. For the first time in the memory of most experts, colleges with small endowments ended the year with better returns than their elite counterparts, according to a survey released today by the National Association of College and University Business Officers (NACUBO) and Commonfund. But while small colleges investing heavily in low-risk, low-return assets lost the least in 2009, they’ve still been outdone, on average, by the wealthiest colleges over the last decade.

Of the 842 colleges and universities that participated in the survey this year, the average loss was 18.7 percent – the worst returns since the Great Depression. Those numbers were even bleaker for colleges with endowments larger than $1 billion, which saw one-year losses of 20.5 percent. Colleges with endowments under $25 million – the smallest category surveyed – lost 16.8 percent on average, granting them the dubious distinction of being the best of the worst.

While acknowledging that small endowments performed better last year, NACUBO and Commonfund executives were quick to discourage endowment managers from learning what they view as the wrong lessons from the data. Less wealthy colleges sustained smaller losses precisely because they were more heavily invested in vanilla assets like government bonds and cash, but no one is ready to tell Harvard University to stuff its billions under a mattress. The goal of any endowment is to see returns on investments that exceed inflation and spending rates, and the alternative investment strategies employed by the biggest financial players in higher education still have the best track record of doing that, according to the survey.

Colleges with endowments over $1 billion have an average 10-year return of 6.1 percent, compared with 3.9 percent for the least wealthy.

“Over time, there’s something about what large endowment managers are doing which is effective,” said John Walda, president of NACUBO.

Despite suffering losses of 29.8 percent and 28.6 percent, respectively, Harvard University and Yale University still have the nation’s largest endowments. Harvard’s endowment stood at $25.7 billion at the end of the 2009 fiscal year, and Yale reported $16.3 billion.

Investing Constraints May Have Helped Less Wealthy

Though they sometimes try, colleges with smaller endowments are limited in their ability to mirror the strategies of Harvard and Yale. That’s essentially because those with limited endowments aren’t invited to play at the big tables. Less wealthy institutions usually lack the financial wherewithal, and often the expertise, to enter into more complex long-term investments like private equity – a category that includes start-up companies. Consequently, smaller colleges are often relegated to investing in categories like fixed income, which includes relatively stable ventures like government bonds. That reality is reflected in the survey. Indeed, the under-$25 million endowment set had 27 percent of their assets allocated to fixed income, nearly triple what the wealthiest colleges have in their portfolios, the survey found.

It was to the good fortune of colleges with smaller endowments that fixed income was one of only two asset classes to post positive returns this year -- the other being short term securities like cash, which is another asset class more favored by the less wealthy. Given the constraints on less wealthy colleges’ investment options, their performance may be more a product of their limited options than their investment savvy, according to John Griswold, executive director of the Commonfund Institute.

“You have to ask yourself with the smaller endowments, is it luck or is it skill that produced that?” Griswold told Inside Higher Ed.

That’s not to say, however, that some colleges with smaller endowments haven’t salivated over the returns posted by the likes of Harvard and Yale and then tried to duplicate their strategies. An increasing number have entered into hedge funds, but they often have limited entrée to the “higher horse power” hedge funds that can yield big returns and pose increased risk, Griswold said. Again to their benefit, however, the hedge funds open to less wealthy colleges did comparatively well this year, Griswold said.

Wealthy Borrowed, and Gifts Declined

For wealthy institutions that invested heavily in alternative strategies like hedge funds and private equity, 2009 was apparently not the year of getting out of those arrangements -- arrangements which, by their very illiquid nature, are difficult to get out of quickly. While there have been anecdotal reports of colleges selling off some of their more illiquid assets at discount rates, the more prevalent practice for wealthy institutions was to borrow to meet short-term cash needs, the report demonstrates. That was an act of good management for institutions with high bond ratings that could take advantage of low interest rates, NACUBO and Commonfund executives agreed.

“For those who qualified, it was a good time to borrow,” Walda said.

Colleges with endowments larger than $1 billion actually increased their exposure to alternative assets in 2009. Those institutions had 61 percent of their assets in alternative strategies at the end of the fiscal year – an 11 percentage point jump since 2008. But that increase is more a reflection of mathematical realities than conscious choices, according to Matthew Hamill, senior vice president of advocacy and issue analysis for NACUBO. Wealthy colleges took some of their steepest losses with domestic and international stock investments, so the percentage of their assets in those categories consequently decreased, creating a greater percentage of assets in alternative strategies, Hamill said.

Colleges also had little luck rebuilding their coffers with gifts from donors. Indeed, 60 percent of those surveyed reported declines in giving, while only 26 percent reported increases. The median decrease was 45.7 percent.

Given the sobering news of the survey, it’s difficult to believe there would be silver linings. Walda, however, managed to find one. The average 2009 loss of 18.7 percent for colleges is actually smaller than previously reported midyear losses, which were 22.5 percent.

“The picture with regard to endowments is a lot cheerier than it was a year ago,” he said.

Well, OK.

Top 20 Endowments

Rank Institution 2009 Endowment 1 Year % Change
1. Harvard University $25,662,055,000 -29.8%
2. Yale University $16,327,000,000 -28.6%
3. Stanford University $12,619,094,000 -26.7%
4. Princeton University $12,614,313,000 -22.8%
5. University of Texas System $12,163,049,000 -24.8%
6. University of Michigan $6,000,827,000 -20.7%
7. Columbia University $5,892,798,000 -19.8%
8. Northwestern University $5,445,260,000 -24.8%
9. Trustees of the University of Pennsylvania $5,170,538,000 -16.8%
10. University of Chicago $5,094,087,000 -23.2%
11. Texas A&M University System Foundation $5,083,754,000 -23.7%
12. University of California $4,937,483,000 -20.6%
13. University of Notre Dame $4,795,303,000 -23.0%
14. Duke University $4,440,745,000 -27.5%
15. Emory University $4,328,436,000 -20.9%
16. Washington University in St. Louis $4,080,554,000 -23.7%
17. Cornell University $3,966,041,000 -26.4%
18. Rice University $3,612,884,000 -21.6%
19. Vanderbilt University $2,833,614,000 -18.9%
20. Trustees of Dartmouth College $2,824,894,000 -22.8 %

Top 10 Liberal Arts Colleges

Rank College 2009 Endowment 1-Year % Change
34. Williams College $1,409,056,000 -22.1%
39. Pomona College $1,333,881,000 -25.7%
41. Amherst College $1,305,944,000 -23.4%
42. Wellesley College $1,266,437,000 -21.4%
45. Swarthmore College $1,128,675,000 -20.1%
47. Smith College $1,096,322,000 -19.7%
49. Grinnell College $1,076,250,000 -26.9%
74. Berea College $791,210,000 -22.7%
80. Middlebury College $699,684,000 -21.0%
83. Bowdoin College $688,384,000 -17.2%

Top 5 Canadian University Endowments

Rank College 2009 Endowment 1-Year % Change
33. University of Toronto $1,411,628,000 -23.2%
71. McGill University $825,194,000 -12.5%
85. University of Alberta $677,700,000 -11.7%
162. Dalhousie University $310,516,000 -13.8%
189. Victoria University in the University of Toronto* $263,913,000 -23.1%

*Victoria, which has its own governing board and chancellor, is independent of the University of Toronto.

Top 5 Historically Black College Endowments

Rank College 2009 Endowment 1-Year % Change
139. Howard University $404,081,000 -18.8%
173. Spelman College $284,706,000 -18.9%
229. Hampton University $193,427,000 -18.0%
374. Florida A&M University Foundation, Inc. $87,770,000 -21.9%
404. Meharry Medical College $75,242,000 -3.5%%

Top 5 Community College Endowments**

Rank College 2009 Endowment 1-Year % Change
465. Valencia Community College Foundation $60,057,000 -10.2%
688. Sinclair Community College Foundation $21,049,000 -19.3%
698. Harrisburg Area Community College $20,035,000 -18.1%
700. Northampton Community College $19,838,000 -12.5%
725. Central Piedmont Community College Foundation $16,725,000 -26.1%

**List does not include colleges formerly identified as community colleges but that have created four-year programs.

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