Endowments Down
Catching up on stuff I’d been ignoring, I see Harvard President Drew Gilpin Faust sent a letter to the community on a subject I’d been wondering about — what’s happened to all these university endowments:
Consider, first, the endowment. As a result of strong returns and the generosity of our alumni and friends, endowment income has come to fund more than a third of the University’s annual operating budget. Our investments have often outperformed familiar market indexes, thanks to skillful management and broad diversification across asset classes. But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody’s, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.
She doesn’t include any specific details, but it’s strange to toss that “30 percent decline” figure out there without saying anything further. You would think that if they’ve lost less than 30 percent they would say so.
31 Responses to “Endowments Down”
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November 16th, 2008 at 2:25 pm
A third of the endowment on operating expenses is really high. I wonder if Harvard isn’t conflating two sets of investments here. Other schools have two different investment strategies. One for the actual endowment, which is long term money given by alums and others. They also invest medium-term income (which can include tuition and other fees), while they use debt-service for short term expenses.
I know for a fact that a couple of colleges that are doing tightening right now are doing it because they got caught with their pants down on the medium-term investments.
November 16th, 2008 at 2:27 pm
Sorry, meant to say “a third of operating expenses from the endowment”. Big difference.
November 16th, 2008 at 2:28 pm
I know of one major fund family that has lost roughly 40 percent across the board in the past year –except for one or two funds in government securities.
Some funds are trying to conceal the magnitude of their losses by posting percentage decline in Year to date –i.e., from Jan 2008 ,not for the past year –from Oct 2007). They are also giving the decline as of a date two months ago — even though they’ve lost a shitload since.
Yahoo’s financial page has the charts/tables.
November 16th, 2008 at 2:35 pm
Re Walker’s comment “Sorry, meant to say “a third of operating expenses from the endowment”.
—————
Harvard and the rest of the Ivy Leaque are extremely nervous over some Democrats in Congress questioning why they are allowed to build up huge ($35 Billion ) endowments using their TAX-FREE status while at the same time they have been screwing the middle class and poor families with huge tuition increases well above the rate of inflation.
Consequently, to head off attempts at reform, Harvard announced a HUGE increase in financial aid for middle class and poor families — cutting the cost for the student roughly in half. Several other Ivies with big endowments followed.
Plus it lets them get the brightest kids because comparable schools with much smaller endowments can’t match the financial aid. Helpful advantage as the huge pool of applicants from the baby boomer children starts to decline.
November 16th, 2008 at 2:36 pm
What she doesn’t mention is that the investment team employs one hundred people(It used to at any rate). Warren Buffett gets just as good returns all by himself. As he’d say, is the bloated staff really necessary?
November 16th, 2008 at 2:37 pm
PS The Democrats questioning Harvard’s past greed weren’t just being tribunes for the poor — they had simply noticed that every time the US government increased financial aid to students by $5 Billion or so, the universities simply raised their tuition to soak up the additional government aid without giving any benefit to the students and their families.
November 16th, 2008 at 2:42 pm
PPS Plus the Ivies get tons of money from the US government for research grants — in addition to their tax free status and indirect subsidy via US government financial aid to students.
In exchange for that multi-billion dollar per year gift from the US taxpayers, the Ivies have been setting aside a lot of seats for the kids of rich foreigners, not US students. Because the foreigners expect something in return for giving to the endowment.
November 16th, 2008 at 4:30 pm
I doubt that Harvard’s endowment has decreased by 30%. I teach at a much smaller college with a much smaller endowment (and I would presume an investment team that isn’t as good as Harvard’s), and we haven’t lost 30% in the last year (about half that, I think).
November 16th, 2008 at 4:51 pm
Don’t for a second think that colleges and universities put all of their money in safe bonds and stocks. The big endowments are (or at least were when I worked in muni bonds) heavily invested in hedge funds etc, and they will therefore suffer big markdowns when their fiscal years end. It also leaves open the possibility that they are having a hard time figuring out exactly how much they have lost.
It could also be that smaller colleges with lower ratings shied away from these funds, either because they were smarter or because the ratings agencies would have thrown a fit if their money was at risk. Harvard is AAA; they can do whatever they want with their money, and were probably in some risky funds.
These drops are serious. Universities pull about 5% from a 3-5 year moving average of their endowments into their operating budgets. The downturn will have impacts for years to come, on students and faculty members alike. Already universities are recalling open positions, and hiring freezes are expected at many universities next year.
In terms of “where is all this money going,” one thing that you constantly hear from college administrators is that they are stuck in a circular battle for students. To keep their SAT scores up, they need the best students; to get the best students, they have to have snazzy new facilities (new dorms, new libraries, new student centers, new athletic facilities, new gyms, etc) because students and their parents are increasingly making decisions on rankings and student amenities. If colleges don’t spend the money on amenities, students will go elsewhere and SAT scores will fall, putting them in a downward spiral. Thus to survive, they have to build, build, build. Colleges have been in a huge building boom for years, which has lead to massive debt and debt service, paid by their endowment and tuition. They all realize that it is somewhat insane, but what choice do they have? It is a classic collective action problem.
November 16th, 2008 at 8:58 pm
Yup, I think they would put it out there if they had lost less than 30%. I suspect that Harvard probably lost closer to 40%, and I think it would suprise a lot of people to find out that these huge college endowments have been behind a lot of the recent speculation bubble in commodities.
November 16th, 2008 at 10:58 pm
Harvard and the rest of the Ivy Leaque are extremely nervous over some Democrats in Congress questioning why they are allowed to build up huge ($35 Billion ) endowments using their TAX-FREE status while at the same time they have been screwing the middle class and poor families with huge tuition increases well above the rate of inflation.
I’ve never had a problem with universities not being subject to an income tax like corporations are. It would create all kinds of problems, and besides, a lot of that lucre is taxed anyways, via the personal income tax bills of the many highly paid individuals who are employed by places like Harvard. However, exempting rich universities from property taxes has always struck as pure crazy.
November 16th, 2008 at 11:06 pm
Stanford and Cornell have announced cuts due to fund losses.
Harvard was heavily invested in commodity futures and therefore must have lost a bundle.
I hope they did – since they were making profits at the expense of the broader public, which suffered with the cost of higher oil prices.
November 17th, 2008 at 2:07 am
The quoted paragraph is good example of bullshit, as defined by philospher Harry Frankfurt. The writer seesm to be telling you something, but if you read the passage closely its clear that it actually gives out no information.
November 17th, 2008 at 11:04 am
Ummm…Matt, how many solicitation letters do you get from the Harvard endowment? Likely a lot.
They have a vested interest in creating a perception of crisis, so that they can raise more money.
I ran numbers on Harvard, and even if they lost half the value of their endowment, and they ran the institution completely from the endowment, they could continue operating for a nearly decade (assuming a 3% return, 3 billion/year expenses, and a 21 billion dollar endowment).
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