Economic turbulence hits endowment returns in US colleges

The average annual total return earned from higher education endowments in the US public and private colleges was -2.7 per cent for the fiscal year ending 30 June 2008, down from 16.9 per cent in 2007 as the current global economic meltdown is making some of the prestigious universities tightens their belts.

This was the third time that negative returns have been reported, and follows a year in which educational endowments reported the highest annual returns.

According to a survey released on Tuesday by the National Association of College and University Business Officers (NACUBO) endowments' investment returns fell an additional 23 per cent from July to November 2008 according to the follow-up survey that was conducted on 796 colleges and universities in the US and Canada.

While a follow-up survey results detail a period of great challenge for college and university endowment managers, the study also shows that college and university endowments continue to realise a 6.5 per cent average 10-year rate of return, outperforming market indices.

''This year's results remind us of the importance of taking a long-term view in assessing endowment performance. Past NES reports show that endowments fell 3.5 per cent in FY01 and 6.2 per cent in FY02 before enjoying several years of double-digit average returns prior to FY08,'' noted John Walda, president and CEO of NACUBO.

Last June, the survey of 791 colleges revealed that the US public and private colleges had an endowment of approx $552 billion, of which an estimated $120 billion could have been wiped out due to the financial crash late last year although an average of 5 per cent of the endowment is spent annually by colleges.
 
College endowments grew 11.5 per cent annually for the five years from 2002-2007, but 77 colleges had had endowments of above in 2007, which is 30 colleges more than in 2005 but last year, 30 colleges have lost the billionaire status since the past seven months.

Harvard University, the richest one in the US with $36.9-billion endowment in September, had earned 8.6 per cent on its investments in the latest fiscal year while stock markets around the world were losing money, Harvard Management Co., the university's investment arm that manages the endowment, had reported. (See: Harvard University's endowment fund grows to $36.9 billion)

The Ivy League school, relying on hedge funds to bring top returns, performed far better than Standard & Poor's 500 index that lost 13.1 per cent during fiscal 2008, which ended on June 30.

In November, the university reported that it was not immune to the global economic turmoil and although it did not comment on how much it had lost but Moody's projected a 30 per cent decline in the value of college and university endowments last fiscal year. For Harvard, that would mean an $11 billion loss - that is, about $550 million in lost income. (See: Harvard University to tighten belt as kitty shrinks)

But in December, for the first time in 40 years, the multi billionaire university said it had lost 22 per cent or $8 billion of its $36.9 billion portfolio, bringing the endowment down to $28.7 billion by the end of October and is looking at a 30 per cent decline for the fiscal year ending in June 2009.

Harvard president Drew Faust and executive vice president, Edward C. Forst wrote a letter council of deans at the university saying, ''To put a loss of that size in historical context, over the last at least 40 years, Harvard's worst single-year endowment return was a negative 12.2 per cent in 1974, and at that time our endowment stood at less than $1 billion and funded a much less significant proportion of University operations.''

Last year the university had put nearly all of the $1.5 billion of stakes it held in private-equity funds on the market but withdrew them as the bids were too low although it was still looking to offload these in the market if it is able to get a fair value for it.

In December, Harvard Management Co was looking to sell holdings in leveraged-buyout funds and to repay commercial paper it sold $1.5 billion in taxable bonds. 

It is reported that even Columbia and Duke University had also put up some of its private equity funds for sale

The decline in endowment fund has not surprised many as some of the best-endowed universities had warned of double-digit decline in August.

Amid fear of the market and endowment conditions will lead to budget cuts, many universities have started to tighten their spending belts on faculty, buildings, scholarships and hiring freezes and other substantial reductions.

Two other areas likely to be affected by the economic difficulties are enrollment and financial aid as many said that they believe their enrollment growth will be negatively affected due to the economy and predicted that they would have to reduce their expenditures for institutionally funded financial aid.

The survey results suggest that institutions with the smallest endowments will be the most adversely affected by the market declines, as they were more likely than better-endowed schools to indicate that they will lower their FY09 endowment draws.

To make up for the losses in endowment, Harvard has already frozen salary hikes at the Kennedy School of Government and the Faculty of Arts and Sciences while Syracuse University laid off 48 employees this month after its endowment fell by 9 per cent to less $1 billion last year.

Brandeis University, in Massachusetts, plans to sell nearly 6,000 artworks estimated to cost approx $350 million and close the Rose Art Museum as its endowment also took a hit.

The Pennsylvania State University, which lost 2.8 per cent in its endowment last year and a 6 per cent reduction in state funding, has asked its employees not to expect any raises.

Public universities have not been spared either with the University losing approx 25 per cent or $500 million and Illinois University losing $370 million.