Endowments 2010: Risk Management, Liquidity, Stewardship

The title says it all: Endowments 2010: Risk Management, Liquidity, Stewardship. Opening year-end statements this year isn't quite as scary as it was last year, but endowment managers still face the need to recover from this recession. And they're going to do it without a return to the former "normal."

Commonfund and NACUBO are now also tracking endowment performance. Preliminary data for the fiscal year ending June 2009, with 504 institutions out of a base of 800 having responded to a survey, shows that the results in aggregate are not as dire as they were for some marquee institutions. The average endowment was down 19 percent for the year ending in June; Harvard reported losses of 27.3 percent that year, while Yale lost 24.6 percent. Most institutions surveyed lost 22.5 percent from July 1, 2008 to November 30, 2008, which means that most participated in the market’s nascent recovery. Spending rates remained constant at an average of 4.3 percent of assets. The full study will be released on January 27.

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Regional SCUP Events! Enjoy the F2F company of your colleagues and peers at one of three SCUP regional conferences this spring:

• March 14–16: Baltimore, MD
• March 24–26: Cambridge, MA
• April 5–7, San Diego, CA

Surviving a Wild Financial Ride

Business Office "blurbs" this article as "Riding out a bucking financial market, institutions are re-evaluating endowment spending rates and carefully scrutinizing budgets." The author, Kenneth E. Reed, director of research and policy analysis for NACUBO, concludes: "While the Great Recession shows signs of abating, it is likely that the stock market and the broader economy will continue to buck college and university endowment managers in an uneven, unpredictable series of ups and downs. The message for all is to hold the reins firm to keep from being thrown from the saddle."

Yale University & the Age of Diminishing Endowments

A Wall Street Journal interview with Richard Levin, president of Yale University. It's focused at first on the effect of diminished endowments on rich school's resource and budget planning. It also covers a lot of ground regarding the history of Yale's relationship with the city of New Haven.

"We had a run that was historically unprecedented, and at the tail end of that it looked like we were getting too rich," Mr. Levin says, recalling that members of Congress were then starting to complain about rich private universities' "hoarding" money. "Well, that's quickly been amended," he deadpans."

Read the article here:
http://online.wsj.com/article/SB124425383780391015.html

Give Me Liquidity! "Maybe being Harvard isn’t so great after all."

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Related, A concurrent session at SCUP–44, July 18–22: Sustaining Small Colleges: Using Models in an Integrated Planning Process

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A very nice article in Inside Higher Ed by Jack Stripling about consequences of past endowment investment practices and current changes:

If there’s any trend emerging, it’s that institutions with endowments of varied sizes are moving toward more liquid investments that allow for speedier access to cash. Met with significant demands on resources at a time when resources are dwindling, colleges simply need money now – like right now. The urgent need for cash on hand, or liquidity, has some finance chiefs looking to disentangle themselves from the complex, long-term investment vehicles that came into vogue across higher education in the last decade.

“It is definitely back to the future in terms of investing,” Nelson said. “You’ll probably see small and medium endowments looking more like they did 10 years ago.”

Google Searching Tip

Here in the SCUP office, we often get calls from members trying to find something. Sometimes they have a paragraph or two from an original manuscript or article, but either don't know where it was published or how to access it. We've discovered a great secret: Take a fairly distinct sentence from the document, put it into Google search with quotation marks around it, and you'll often find a link directly to the original, or a copy someone else has made available on line.

For example, you might have a paragraph from an article that includes this sentence: " Investment managers faced several unexpected jolts, including the credit freeze, subprime mortgage meltdown, and slowing U.S. and world economies." A Google search for those terms, in that order, kept together by quotation marks yields a strike on the very first listed link. It's a recent Business Officer article about the current trajectory of institutional endowments.

Seriously, this searching trick is not to be underestimated.

Is There an 'Education Bubble'? And Not Just at Harvard?

On The Deal Professor blog, Steven M. Davidoff looks closely at Harvard's financial situation and draws potential conclusions about an 'education bubble' potentially being burst by illiquid assets:

So, my numbers are rough, very rough estimates — but the problem is apparent. In the short term, unless it boosts its liquid returns, Harvard is going to have to raise a lot in donations or eat up its liquid assets to fund university obligations and its private equity commitments. This results in a spiraling decline in Harvard’s liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity. This assumes the markets stay where they are in the next three years — there are scenarios where liquid assets do worse (like yesterday), or better, of course.

This is likely why Harvard recently sold $1.5 billion in debt, and unsuccessfully tried to sell $1.5 billion of its private equity portfolio. It needs to cover short-term funding obligations rather than liquidate illiquid assets at fire-sale prices. In essence, Harvard is more like a hedge fund than ever — trading for short-term gain with the same risks involved.

Other universities may be in worse positions. Duke, for example, sold $500 million in bonds, and Princeton $1.5 billion. Again, the reason appears to be to fund liquidity.