College and university endowments suffered huge losses in the fiscal year that ended last June, a new report finds, but stronger investment returns in recent months point to a rebound.
The global economic crisis shrunk the ranks of billion-dollar endowments from 77 to 54 in a year's time, according to a report Thursday that provides the fullest picture yet of endowment performance in the 2008-2009 fiscal year.
The value of university and college endowments fell almost 19 percent on average during that period in what report authors described as the worst decline since the Great Depression.
While the downturn hit all types of universities, elite schools such as Harvard, Yale and Stanford absorbed some of the deepest losses. Some of the richest private schools, which rely heavily on endowments to operate and flourished in boom times, have resorted to cutting staff and shelving construction projects.
"What last year demonstrated is that what goes up does come down — and that's what happened to college and university endowments," said Terry Hartle, senior vice president of government and public affairs for the American Council on Education.
Volatile decade for endowments
Things appear to be headed up again, mirroring trends in the stock market and most other investments. In the 2009 calendar year, Duke's endowment grew 8.5 percent and Georgetown's grew 8 percent, school officials said, and other colleges and universities have reported similar gains.
The swings are part of what has been a volatile decade for endowments, which are managed as permanent assets and are especially crucial for large private schools that don't rely on state funding.
The average rate of return on endowments soared as high as 17 percent as recently as 2006-2007; endowments on average posted annual gains of 4 percent during the up-and-down 2000s.
During flush years, colleges and universities have come under pressure to increase spending from their endowments to lessen the burden on students struggling with rising tuition and costs.
Schools spend 4 to 5 percent of their endowments annually on student aid, faculty, research and other costs.
On average, schools spent 4.4 percent of their endowments on operating costs in the last fiscal year, up slightly from the year before. More than 7 in 10 schools with $1 billion-plus endowments increased spending.
"To the extent endowments are there to support the academic enterprise during difficult times, they stepped up to the plate this year," said John Walda, president of the National Association of College and University Business Officers, which jointly issued the report with the nonprofit Commonfund.
‘Sitting on those resources’
But Lynne Munson, an endowment researcher who has testified before the Senate Finance Committee on the issue, said little evidence exists showing schools with huge endowments are using their wealth to help more students attend college, increase their undergraduate class sizes or deepen research commitments.
"They are mostly focused on sitting on those resources," she said. "If you try to sit on too much wealth for too long, you're going to lose a big part of it."
Republican Sen. Chuck Grassley of Iowa, who has pressed for a minimum payout requirement for endowments, said in a statement he hopes the losses do not lead to tuition hikes or student aid freezes.
Many colleges "relied on some risky investments, like hedge funds, to get big gains in recent years, and now those strategies are causing losses," he said. "Students shouldn't bear the brunt of colleges' easy-come, easy-go investment strategy."
Matthew Hamill, a senior vice president at NACUBO, disputed the notion that endowment managers are relying on risky strategies with little regard for the students. He said university endowment managers have posted better returns than major market indexes like the S&P 500.
"That seems to suggest the investment strategies are very carefully thought through," he said.
For the first time in several years, smaller endowments outperformed large ones, in large part because of their reliance on fixed-income investments, the report said. More universities and colleges sought to diversify their portfolios by investing in hedge funds, private equity and venture capital.
Greatest loss at Harvard
Of the universities with supersized endowments, Harvard, the largest, suffered the greatest losses — 30 percent, from $36.5 billion to $25.6 billion in 2008-9. That loss is larger than the entire endowments of all but four other schools.
Harvard slashed about 275 jobs last year and has announced other cost-cutting moves, including suspending a massive $1 billion expansion project.
The return on Duke's endowment dropped 24.3 percent to $4.4 billion in 2008-2009, said Michael Schoenfeld, vice president for public affairs and government relations. The private school in Durham, N.C., postponed a major construction project, offered early retirement incentives and isn't increasing salaries for employees making more than $50,000.
But as with many schools, the last decade has been good to Duke's endowment as a whole — its average annualized returns have been 10 percent, Schoenfeld said.
"It was certainly not catastrophic to the university's aspirations," he said.