WSJ: College Endowments Plunge

Parents Forum
21

<p>Interesteddad, full paying students pay the educational costs at Swarthmore. No?</p>

<p>They don't pay the fixed costs, building costs, interest costs, depreciation, for the non-teaching staff, etc. </p>

<p>So.. if Swarthmore added 10 more students, it wouldn't cost the school $80,000 per additional student, would it?</p>

<p>The school might even make money on those students? Doesn't mean the school is going to do that, but the school could make money allowing 10 more students into the school.</p>

22

<p>dstark:</p>

<p>How do you break up the "product" at Swarthmore into "educational" and "not educational" when the product is a 24/7 residential learning experience that includes every thing, every place, and every person the student encounters? For all intents and purposes, there is nothing at Swarthmore that isn't focused on the undergrad experience.</p>

<p>Anyway, here is the per student operating expense from 2007-2008:</p>

<p>**Instruction $29,440
Academic support $10,765
Student services $7,557
Research and public service $3,053
Auxiliary activities $14,150
Institutional support $16,108</p>

<p>Total operating expenses $81,073**</p>

<p>Swarthmore took in **$32,252 **per student in net tuition, fees, and room/board charges.</p>

<p>What do you want to count as "instruction"? I mean, the Instruction headig is pretty self-evident. So is academic support. That includes the cost of the library, the writing associates program, the 130 outside honors examiners, and so forth. Student services includes the health center, psych counseling, security, academic deans, and so forth. Research and public service activities all involves undergrad students. Auxillary services is the dining hall and dorms.</p>

<p>Faculty and staff costs alone at Swarthmore are $46,370 per student.</p>

<p>Could these costs be reduced? Or spread over more students? Sure. But, then the "product" is not the same.</p>

<hr>

<p>
[quote]
So.. if Swarthmore added 10 more students, it wouldn't cost the school $80,000 per additional student, would it?

[/quote]
</p>

<p>Depends. For starters, that's one more faculty slot to keep the 8:1 ratio. Dorm space is OK because the school just completed two new dorms and took quite a bit of undesireable housing (basement rooms, converted lounges) out of inventory. Dining hall is at capacity. Library is at capacity. Classroom space is OK after a sustained building cycle. Swarthmore has held enrollment fixed for about a decade now as they've been shuffling dorm space during major construction. So they could probably return to their historic linear growth rate of an additional five students per year.</p>

23

<p>Dcstark, I can pretty much guarantee you that the Boards and University Presidents have no idea what their highly compensated investment team has been doing with their generous contributors money. If they went out and kicked a few tires and actually saw the companies and real estate they owned they would be shocked.</p>

24

<p>There is some speculation that the biggest university endowments lost more than they've revealed.</p>

<p><a href="http://www.thebigmoney.com/articles/diploma-mill/2009/01/27/losing-harvards-billions%5B/url%5D"&gt;http://www.thebigmoney.com/articles/diploma-mill/2009/01/27/losing-harvards-billions&lt;/a&gt;&lt;/p>

25

<p>sm74, I agree with you.</p>

<p>This tells me the guys who run the schools are overpaid.
The investment managers are overpaid.</p>

<p>If you cut the cost of the investment managers and those that run the company, the cost of running a school drops. The cost per student drops. Many of the costs are paying people too much.</p>

<p>Hoedown, interesting link. Very risk speculation in endowments. Amazing losses. Illiquid. Endowment per student...what a joke. High paid money managers. High paid money managers that were gambling with that money. Well, investing is gambling, but these managers....</p>

<p>"The lack of clarity says a lot about how exotic Harvard's finances have become. Its team of highly incentivized money managers—who themselves earned $26.8 million in 2008—adopted a strategy aimed at taking maximum advantage of an inflationary global boom in the early 2000s by shifting the lion's share of Harvard's money from conventional endowment assets—such as bonds, preferred stocks, Treasury bills, and cash—into more esoteric investments that would presumably rise as more money chased after scarcer goods. They bought, for example, oil in storage tanks, timber forests, and farmlands. As the proliferation of trillions of dollars worth of subprime mortgages further expanded the bubble, driving up the price of oil, lumber, and land, the notional value of Harvard's portfolio soared.</p>

<p>The price of oil, for example, which Harvard and other speculators were storing, more than quadrupled to $153 a barrel on commodity exchanges, allowing Harvard to hugely appreciate the notional value of its portfolio. So between fiscal 2003 and 2008, Harvard's "real assets" showed a gain of nearly 25 percent annually. But even after the subprime mortgage crisis began to unfold and a number of financial institutions had collapsed, Harvard's money managers persisted in pursuing this risky course.</p>

<p>Consequently, as late as June 2008, the fund kept almost no reserve of cash or Treasury bills and allocated a mere 6 percent of its money to fixed-interest bonds. It also borrowed more than $1 billion to amplify the returns on its less conventional investments. So by the time the bubble burst in the fall of 2008, only a small fraction of the endowment fund investment was even under the jurisdiction of the SEC. According to the November 7th 13F holding report it filed with the SEC for the quarter ending September 30th, 2008, Harvard had only $2.88 billion of its funds in exchange-listed stocks, options, or other derivatives. What of the more than $35 billion it had allocated to investments at the start of fiscal 2009 (i.e., July 2008)? Most of the balance had been allocated to investments, which if not totally illiquid could not be valued by market activity. The breakdown that follows illuminates how far HMC had strayed from the path of traditional endowment investing in the last decade.</p>

<p>More than one-quarter of Harvard's funds were still sunk in "real assets": about 8 percent in stockpiled oil, about 9 percent in timber and other agricultural land, and 9 percent in real estate participation. Then came the financial crises, and prices plunged. Oil fell to less than $40 a barrel. Lumber suffered almost as badly. And, with the drying up of bank lending, the value of Harvard's real estate holdings—which remain opaque—became at best problematic. One indication of how steep the loss may be is that CalPERS, the giant pension fund of the California Public Employees' Retirement System, which owned even more real estate acreage than Harvard, reported in this period a 103 percent loss on real estate deals in which, like Harvard, it had borrowed to amplify its profits.</p>

<p>Another huge portion of Harvard's endowment had been farmed out to hedge funds (18 percent) and private equity funds (13 percent). While these funds provided some diversification, many of them also impose restrictions on withdrawals, including ones, like Citadel, that suffered substantial losses. To get back its money under such circumstance, it was often necessary to sell at a steep discount to a "secondary" hedge fund. One major player in the private equity business tells me that Harvard had tried this fall to sell its private equity stakes at 30 percent to 35 percent discounts but could find no buyers even at those prices. It's also possible that Harvard will have to meet "capital calls" on its private equity investments that would sap even more capital.</p>

<p>Harvard also allocated nearly $4 billion, or 11 percent of its fund, to volatile emerging markets, such as Brazil, Mexico, and Russia. Here its money managers bet both that the stocks would go up and that the local currencies would at least hold steady against the dollar, but they lost on both counts. First, the thin local stock markets, which had little liquidity, collapsed in the financial crises. For example, Russian stocks lost almost 80 percent of their value in a matter of days last fall. Then, as banks and hedge funds got out of their currency trades, the local currencies in many of these countries also lost heavily against the dollar. The Brazilian real, for example, fell about 40 percent last year. So presumably the endowment fund took a double hit. Aside from emerging markets, Harvard had invested another 11 percent if its portfolio in more established foreign economies, as those of Britain, Germany, France, Italy, Australia, and Japan. But here the stock markets declined and, with the exception of the Japanese yen, so did their currencies.</p>

<p>Given the true cost of getting its money out of the hedge funds and other illiquid investments, my knowledgeable source finds the claim by Harvard's money managers that the fund lost only 22 percent at best "purely Pollyannaish." (A Harvard University press representative declined to comment for this story.) But while Harvard's money managers may chose to look through rose-colored glasses at the value of their portfolio, Harvard University, which relies on the interest from distribution from its endowment to fund one-third of its operating budget, needs to be more realistic."</p>

26

<p>I'd like to get one of those jobs where I can lose $18 billion and make millions a year.</p>

27

<p>hoedown, thanks for that. An $8 Billion loss to them was a big hiccup. $18 Billion would be a disaster.</p>

28

<p>I should have said that the Board and President do know how bad it really is, they don't want to know the specifics though, and more importantly they don't want me, you, or their professors to know because if we did it would be clear that a few band-aids was not going to be enough to get their financial house in order.</p>

29

<p>It was one thing to say that your endowment was down 15% to 20% last October when all you had to go on was the price drop in publicly traded stocks. Any college that is still sticking to that story today, in late January (when it is obvious what has happened to private equity and venture capital and oil and timber and real estate) is simply trying to deceive by ignoring the losses in the non-liquid investments. Simple as that.</p>

<p>To put it even more bluntly, they are lying. And, they think their customers are stupid. Moody's Investment Services, which tracks higher education finances closely as part of their bond rating service, has been saying for some time that the average endowment loss will end up somewhere in the 30% range. </p>

<p>If I were choosing a college this year, I would pay very close attention to which ones are lying, which ones are shooting straight, and which ones aren't saying anything.</p>

30

<p>"I'd like to get one of those jobs where I can lose $18 billion and make millions a year."</p>

<p>I think that most of us would resign if we got close to losing a fraction of that amount and hang our head in shame. I think that it actually takes quite a bit of work to lose that kind of money when you consider you have to put stuff into financial instruments. One could have built a concrete and steel vault, put a bed in it and just stuff the money in a big mattress and done better.</p>

<p>Most people would probably be too honest and afraid to lose this kind of money that belongs to someone else.</p>

31

<p>I've said since October that the entire faculty of the Harvard Business School should resign in disgrace. What **have **they been teaching to have the collective business leadership of the top financial institutions fail so comprehensively?</p>

32

<p>It would be a useful experiment to compare what would have happened to the Harvard ( or any other ) endowment if they had just invested in the S&P 500 index over the last 20 years. I'm just guessing, but I think that the actual managers would have beaten the index by a substantial margin, despite the recent setbacks. If this is the case they probably deserve to be richly compensated, because beating the index over a long period is no mean feat.</p>

33

<p>Here are President Casteen's comments regarding UVA's endowment. This was sent out in November. He does a very good job addressing their issues: </p>

<p>
[quote]
Dear Alumni, Parents, and Friends:</p>

<p>All of us are feeling the effects of the global economic crisis. I write to let you know how this crisis is affecting the University and how we are working to protect and sustain our operations. Because press (and blog) speculations about what the crisis is doing to universities, including us, have been both numerous and generally mistaken, I want also to respond to a few misstatements about the impact of the financial meltdown on our endowment.</p>

<p>The economic situation affects us in several ways. We see evidence of the crisis in state budget shortfalls. Last month, Governor Kaine released a plan to meet the state's 2009 fiscal shortfall of $973.6 million. The overall reduction for us is $10.6 million, or ca. 7 percent of our General Funds. The Governor has deferred a 2 percent salary increase scheduled to go into effect November 25. This delay applies to staff and faculty members. We have never used layoffs here as a means to balance budgets. Layoffs are not a strategy for us now. We are cutting expenditures in many areas throughout the University. Units that depend heavily on tax dollars are particularly stressed as we round out this quarter.</p>

<p>These cuts did not come as a surprise. Through press releases, the Governor alerted everyone earlier this fall of the strong possibility of budget cuts ranging from 5 to 15 percent. Since then, we have been preparing for reductions. Deans and vice presidents have been planning permanent reductions in spending. The instructions given to them have included prohibitions on affecting essential services to students and to patients who depend on us every day. In bad times, we protect our core work of teaching, conducting research, providing best-practice care for patients, and providing public service. We do not look for ways to panic those who count on us. We seek to provide these essential services without noticeable interruptions.</p>

<p>A second effect of the global economic crisis is evident in the University's endowment, which has seen a decrease in value coinciding with the fall-off in global equity markets. The long-term pool invested by the University of Virginia Investment Management Company (UVIMCO) decreased from $5.1 billion on June 30 to $4.2 billion on October 31—a decline consistent with the best results reported so far by similar endowments. This is a 20 percent decrease. The S&P 500 index dropped 24 percent over the same period of time.</p>

<p>UVIMCO is taking all available steps to assure the long-term health of the endowment. We expect to see gradual recuperation when global financial markets begin to stabilize. With this in mind, we are continuing to build the endowment. We have added $150 million to UVIMCO's long-term pool since July 1. Last June, the Rector and Visitors approved an increase in the annual distribution of the endowment from 4.5 percent of equity to 5 percent. That adjustment in spending translates to $161 million in fiscal year 2008-2009. Despite the current economic crisis and consistent with the Rector and Visitors' instructions, we are making this distribution as planned. As a result, our schools and departments will have more resources at their immediate disposal for the remainder of this year than they had before the state cuts. </p>

<p>Though the recent drop in the endowment's value is consistent with what is happening all around us, it is an aberration in a long story of success. UVIMCO's staff and its board of investment professionals have managed the University's assets uncommonly well during the last decade, bringing in a 10-year average annual return of 12 percent through the period that ended October 31, 2008, including a 25.2 percent return in fiscal year 2006-2007. The average return on the S&P 500 index for the same 10-year period was zero percent. Prudent investment strategies have allowed us to weather previous downturns. During the first Gulf War, the University's endowment reported a negative 10.2 percent for the third quarter but finished fiscal year 1991 at plus 8 percent. During the 1987 stock market crash, the endowment reported a negative 12.2 percent for the fourth quarter but closed out the fiscal year at no loss. Our endowment bounced back from those losses. It will bounce back from these current losses. Our colleagues at UVIMCO understand the nuances of the global markets. They invest for the long term, as they should, not simply for a single quarter or even a single year. </p>

<p>Ill-informed stories in the press and in blogs about the structure and status of the endowment have created at least some misunderstanding and misleading speculation. The long-term pool invested by UVIMCO consists of three major components: the core endowment overseen by the Rector and Visitors, the University's corporate entity ($2.6 billion as of October 31, 2008); University-related foundations' endowments ($1.0 billion); and other non-endowment assets ($0.6 billion). While the core endowment is important for supporting initiatives such as new academic programs and the growth of the Board's AccessUVa financial aid program, funds from the endowment make up just 4.8 percent of the overall operating budget, which is $2 billion this year. Other revenue sources—tuition, state funds, sponsored programs, sales, patient revenues, private gifts—stabilize the University in tough times.</p>

<p>For several reasons, we remain confident about both the near-term and the more distant future. All three of the major rating agencies confirmed our AAA-bond rating in conjunction with the issuance of $231 million in tax-exempt long-term bonds in May 2008. Since then, and as recently as last week, our bonds have sold promptly when issued and at the best rates in the market. This bond rating provides financial strength and stability to help us get through this period of economic turmoil. During the current crisis, we have had no problem issuing debt, in part because of this strong credit rating. We do not expect this crisis to end next week. Our planning and financial positioning assume a long, slow recovery and more than a few new realities as the nation and the world move from today's economy to whatever circumstances we may confront in the future.</p>

<p>Despite today's economic environment, we continue to make solid progress in the Campaign for the University of Virginia. Current and future support commitments totaled $1.783 billion as of the end of September. Generous gifts made during the first half of the campaign have given us momentum heading into the second half. We are continuing to invest in new capital construction and new academic programs to support our students and faculty—and to create jobs for persons who live in this region. We are working steadily to create centers of excellence in science, engineering, and biomedicine, while continuing to support core strengths in the humanities. In all important ways, we are moving forward. </p>

<p>We have weathered economic downturns before. Public universities are subject to the same exaggerated up-cycles and down-cycles that have affected almost all public entities during the last half-century. The downturns disrupt important work. They can prevent students from distressed families from pursuing the best available educations, and thus create harm that extends across generations. Today's situation requires us to make hard decisions. If we make these decisions wisely and with our values clearly defined, today's crisis can also teach us new fiscal disciplines and improved strategic thinking. In some cases, we are deciding now what we cannot do and also what we must do. The discipline and analysis that lie beneath these decisions will make us more efficient and more effective. Through all of this, we will sustain our commitment to access for all qualified students who apply, to uninterrupted excellence in teaching, research, and patient care, and to a stable work environment for the staff and faculty members whose work and accomplishments have made our University the world's standard of excellence in public higher education. </p>

<p>Expert fiscal managers who handle our resources wisely and with their eyes on our goals as a university and members of our University family all over the world make us stronger in this down-cycle than other universities are. Private philanthropy gave our University its beginning. Private giving has sustained it during tough times. All of us are making hard decisions at home in these days. I have been asked this week for advice about what kinds of year's-end gifts might make the biggest difference this year. My answers to these questions necessarily vary because each of us has her or his top priority. Betsy and I put most of our gifts into a fund that will eventually provide scholarships for children of staff and faculty members. This year, we are making an additional year's-end gift to AccessUVa. Our reason for giving more to AccessUVa is that we are personally concerned that the first and most serious damage done by this economic downturn may be to top students whose parents will not be able to afford to send them to college because of the ongoing national catastrophe in student financial-aid programs. Others may make any number of other decisions about their own gifts. If Bob Sweeney or your school's dean or Craig Littlepage or I can help as you decide your own purposes this year, please send an email to one of them or to me (<a href="mailto:jtc@virginia.edu">jtc@virginia.edu</a>). We will respond as quickly as we can.</p>

<p>Whatever you may decide to do (or not do) as this year approaches its end, I am grateful for your gifts and guidance and volunteer leadership in past years. You have helped make ours one of the top universities in the world. In this time of economic uncertainty, we will rely more than ever on you—on your time and talents and material gifts—to help us hold our ground and build new strengths for the future. For this, and for your unfaltering commitment to this bulwark of Mr. Jefferson's imagining and making, I am in every sense grateful.</p>

<p>John Casteen

[/quote]
</p>

34

<p>Curious, first I think if and when these assets are accurately valued you will find that a passive approach would have been better.
Secondly, in a passive more transparent approach you would not have built up such a huge expense base in the first place. Professors would not have gotten the big-time contracts that they now have and some of those gold plated buildings would not have been built and mortgaged.
One final point, I don't believe this crisis has come out of nowhere. When the dust settles I think you'll find that the investors knew big time problems were coming in 2007.</p>

35

<p>Casteen was hoping for the best and lying.</p>

36

<p>I thought that was a great letter. I would like to see similar ones from other Universities.
Barrons, what leads you to believe that he is lying? sm74, if they knew problems like this were coming they truly are geniuses and deserve the big bucks. This kind of panic and the bubble that preceded it are expectations driven phenomenon and by definition hard to predict.</p>

37

<p>I know U-M has a link on the front page of their website that takes you to statements about the fiscal crisis. I would think other universities would also have things posted.</p>

38

<p>John Casteen has done a wonderful job at UVA and is a man of tremendous professional and personal integrity. I assure you, he was not being disengenuous.</p>

39

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<p>Heck, investing your endowment in REGULAR normal investments has turned out to be a big bust, too. Citicorp, GM, Ford, etc.--far from alternative investments, but toxic just the same.</p>

<p>I would hope that colleges would have mercy on the poor parents--after all, our investments haven't done much better than theirs. They should know how it feels. Wouldn't count on it though...</p>

40

<p>If you're in liquid assets like stocks, at least you can get out.</p>

<p>Buying illiquid assets is like checking into a roach motel, easy to get into, very difficult to get out.</p>