Study: endowment hit harder than average

Feb. 4, 2010, 12:07 a.m.

A study by the National Association of College and University Business Officers (NACUBO) and the Commonfund indicates that Stanford’s endowment took a significantly greater hit than the national average in fiscal year 2009. The University endowment was valued at $12.6 billion, a 27-percent decline from the previous fiscal year.

NACUBO and Commonfund collected statistics from 842 American institutions of higher learning to produce their annual endowments study. According to the groups’ research, endowments experienced an average reduction of 18.7 percent in fiscal year 2009, which began July 1, 2008 and ended June 30, 2009.

Study: endowment hit harder than average
(BECKY WRIGHT/The Stanford Daily)

Stanford’s investment portfolio was widely diversified in previous years, said John Powers, president and CEO of the Stanford Management Company (SMC). SMC handles the Merged Pool, the University’s main investment tool, and is in charge of the payout policy.

While the report revealed that many endowment managers relied on alternative investments that performed poorly last year, including private equity, hedge funds, and venture capital, according to Powers they were not to blame for the endowment loss.

“The alternatives in general outperformed the more conventional investments,” Powers said. “So, it’s actually not the case that it was the alternatives that created huge difficulties for us.”

Elaborating on this point, Powers said that the decline in asset values was challenging because SMC needed to make payouts to the University for operating purposes while also funding capital calls from the University’s investment partners.

“We didn’t have enough liquidity and freedom to be flexible in response to the market conditions that we wanted,” Powers said. “Managing the liquid resources and improving the level of liquid resources of the portfolio was the biggest challenge.”

Powers noted that the market’s strong recovery in calendar 2009 was a saving grace. Although he could not disclose exact figures, Powers asserted that “the endowment is in better shape” at the moment than it was in fiscal 2009.

Furthermore, recent business reports have indicated that Stanford is leading the pack when it comes to fundraising money from private donors. The University beat out other colleges and universities for the top spot for the fourth consecutive year.

But Stanford’s fundraising efforts were not immune to the recession; the amount of fundraised money dropped to $640.1 million in FY2009 from $785 million in FY2008, representing an 18.7-percent decline. In comparison, Harvard took second place and raked in little over $601 million, a 7.5-percent drop from the previous fiscal year.

Across the nation, university expenditures are on the rise, increasing funding needs. The NACUBO-Commonfund study found that 43 percent of institutions increased their spending rate in FY2009. On average, universities spent 4.4 percent of their endowment assets, up by a slim 0.1 percent margin from the previous fiscal year.
In comparison, Stanford’s total expenditures grew by approximately one percent. The endowment payout was $959 million, equal to 5.57 percent of the endowment value at the beginning of FY2011, Etchemendy said.

Cost-cutting measures, however, are in place on the Farm. The administration began to make significant budget cuts in FY2009, while the majority of cuts will come into full effect this year.

For Stanford and its peer institutions, there is no recourse but to weather the storm and continue to rely on the endowment, while reducing strain on its resources. According to Randy Livingston, Stanford’s CFO and vice president for business affairs, the University reduced the payout on individual funds by 10 percent for the current fiscal year, with an anticipated 15 percent reduction in FY2011.

“We have made a number of changes to our internal financial structure to help buffer against revenue shocks of the sort we experienced last year,” Etchemendy said. “But ultimately, as long as we are reliant on endowment income, we will continue to be subject to sharp changes in the investment climate.”

Tuition, the most steady source of revenue, does not generate enough money to support all academic, research and residential needs.

“To become less reliant on endowment income, we would either have to radically decrease the quality of the education we offer…or radically increase tuition,” Etchemendy asserted. “I don’t think our students or their parents would want us to do either of these.”

Indeed, barring the events of 2008 and 2009, the endowment model has proven to be robust. Powers noted that last year’s financial performance was an anomaly.

“Fiscal year 2009 was literally an 80-year flood because it hasn’t been that bad since the period of the Depression,” Powers said. “But nevertheless it creates a great laboratory to say, ‘Do we like the way our portfolio performs under all conditions, including the most extreme conditions?’”

“We wouldn’t be being responsible unless we were willing to look at our practices and ask ourselves what we could do better,” Powers added.

Login or create an account