<p>Princeton</a> University - Tilghman provides update on University's budget outlook</p>
<p>"While the University's fiscal outlook has benefited from better than expected returns on its endowment and the implementation of cost-savings measures, Princeton will need to continue with its two-year plan of budget reductions to protect its core programs, according to President Shirley M. Tilghman. . . . (continued)</p>
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<p>The returns are in and Princeton's endowment has taken a tumble along with its peers. The situation for all of them is, however, much better than it looked in December of 2008 when each of them had lost a great deal more. Princeton's endowment benefited greatly from remaining in the market during the rapid improvement in equities last spring but it still suffered from significant losses in its less liquid assets.</p>
<p>The four largest university endowments in the country belong to Harvard, Yale, Princeton and Stanford. Here is a comparison of how they fared this last fiscal year.</p>
<p>Ranked by Size of Endowment:</p>
<p>Institution----------Current Value-----Endowment Last Year---% Change</p>
<p>Harvard-------------$26.0 billion ---------$36.9 billion --------29.5% drop</p>
<p>Yale----------------$16.3 billion ---------$22.9 billion---------28.8% drop</p>
<p>Princeton-----------$12.6 billion ---------$16.3 billion ---------22.7% drop</p>
<p>Stanford------------$12.6 billion ---------$17.2 billion ---------26.7% drop</p>
<p>Ranked by Smallest Drop to Largest Drop in Endowment Size:</p>
<p>Princeton-----22.7% drop</p>
<p>Stanford------26.7% drop</p>
<p>Yale----------28.8% drop</p>
<p>Harvard-------29.5% drop</p>
<p>The drop in the size of the endowment is not the same as the investment return. The total percent change in the size of the endowment is a combination of investment return plus all additions to the endowment (i.e. gifts) minus all withdrawals of capital from the endowment. If we look at actual investment returns for these four largest endowments they are ranked as follows.</p>
<p>Ranked by Best Investment Return to Worst Return</p>
<p>Princeton----- negative 23.7% return</p>
<p>Yale---------- negative 24.6% return</p>
<p>Stanford------ negative 25.9% return</p>
<p>Harvard------- negative 27.3% return</p>
<p>Of these four schools, only Princeton decided not to withdraw funds from its endowment last year. The belief was that selling investments at the bottom of the market would be a bad idea so it increased its debt through issuing one billion dollars in bonds. That money, plus a reduction in expenses, allowed the university to avoid liquidating any of its investments under duress. All of the other three schools also borrowed by issuing debt. Harvard borrowed 2.5 billion dollars from the capital markets, Yale borrowed about 1.5 billion and both Princeton and Stanford borrowed 1.0 billion. The other three schools chose to continue spending from their endowments even in the face of the downturn with the result that the drop in the size of their endowments was significantly greater than their investment losses.</p>
<p>Now, theoretically, a university could borrow against its endowment up to close to the value of that endowment, greatly increasing its debt but leaving the size of the endowment unchanged. It would appear that a school had a very large endowment but it would be an illusion as that endowment would be offset by the debt it was carrying. For this reason, it is probably more revealing to consider the total market value of each endowment minus the debt that the institution has taken on. Accounting for the additional debt reveals a very different picture. </p>
<p>Current Value of Endowment Minus Total Current Bond Debt</p>
<p>Harvard------------ ($26.0 billion - $6.6 billion) = $19.4 billion</p>
<p>Yale -------------- ($16.3 billion - $4.6 billion ) = $11.7 billion</p>
<p>Princeton --------- ($12.6 billion - $2.5 billion ) = $10.1 billion</p>
<p>Stanford --------- ($12.6 billion - $2.5 billion ) = $10.1 billion</p>
<p>The figures for Princeton and Stanford are identical now. Each has an endowment of about $12.6 billion and bond debt of about $2.5 billion and each is now tied for third place in this group.</p>
<p>What a change!</p>
<p>After reporting years of dramatic growth, each of these four large endowments suffered serious plunges. Each of them has insisted that it is better off having followed this investment strategy as each is far ahead of where it would have been using a different investing approach. This argument seems convincing but it will be very painful to deal with the reductions necessary to manage their finances in the coming years. </p>
<p>There are other hidden problems as well. Each school has capital commitments that it has made to private equity firms that require it to make additional investments in the future as needed by the equity firms. This is not a small burden. In Harvard's case it is between 25% and 30% of the entire size of its current endowment. These additional required investments could cause severe cash shortages for these institutions in the future.</p>
<p>The largest endowments seem to have fared the worst this year (even as they fared the best in previous years). Here's a look at the returns for the rest of the Ivy League. Penn was the winner here (if any of these results can be described as "winning"!) with the lowest total percentage loss. </p>
<p>Ivy League Endowment Changes From Best to Worst</p>
<p>Penn---------15.7% drop to about $5.25 billion</p>
<p>Columbia-----19.7% drop to about $5.7 billion</p>
<p>Princeton-----22.7% drop to about $12.6 billion</p>
<p>Cornell-------26.0% drop to about $4.0 billion</p>
<p>Brown--------26.6% drop to about $2.04 billion</p>
<p>Yale----------28.8% drop to about $16.3 billion</p>
<p>Harvard-------29.5% drop to about $26.0 billion</p>
<p>The bottom line on all of this is that among the largest endowments, Princeton did extremely well. Among the Ivies, it was about in the middle.</p>