WSJ: College Endowments Plunge

Parents Forum
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<p>To give you an idea of just how disingenous Lee Bollinger is being about Columbia's endowment, realize that on June 30th, only 19% of Columbia's endowment was invested in publicly traded stocks, bonds, and mutual funds. 81% was in private equity and hedge fund limited partnerships.</p>

<p>I scratch my head in bewilderment trying to think what he hopes to gain by being so dishonest about Columbia's endowment losses. The only thing I can figure is that things must be disasterous.</p>

<p>At least when Harvard misled the press into reporting just a 22% loss, they clearly stated that the figure didn't include losses on non-liquid investments. They correctly assumed the press would be too incompetent to report that part. Lee Bollinger didn't even come close to Harvard's level of disclosure. 999 out of 1000 people would read his statement and believe that Columbia only lost 15% in the market crash. Heck, even Bernie Maddoff didn't do that well, did he?</p>

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<p>If I make as much as Bollinger per annum, I'll personally sign sincerely on all of Columbia correspondence.</p>

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<p>Harvard is taking some shots here that ought to be aimed at Yale. Yale innovated this investment strategy for endowment funds and literally wrote the book on it. [I forget the name of the book but you can find it easily if anyone's interested] Harvard copied Yale. So did MIT. When MIT brought in a new president a few years back from Yale, she brought over a person from the Yale endowment fund to run MIT's. Now there are many of the top endowments with these alternative, illiquid investments in timber, oil in tankers, real estate, hedge funds etc. There is an astounding lack of transparency at these schools as to what has really happened to the endowments and I believe that there has to be alot of CYA and internal finger-pointing going on. The administrations are accountable but the issue is will they be made to account by the trustees. </p>

<p>I am also unimpressed by comments here to the effect that the endowments pay for half (or some other high percentage) of educating each student. The colleges put this out there, but it is utter nonsense. In order to make that claim they include all of their bloated administrative and general expenses, salaries and staffs of professors who dont teach or teach little, benefits and pensions, lobbying, rapidly growing community, national and international social programs, fund raising, etc. This is where their increases in expeditures have been over the last two decades, and it has been funded not only through the endowment but also through unprecedented increases in undergraduate tuition. The issue now is, with the decline in the endowments (greater than 50 % in my view) will they cut back on this spending by 25-50%, to where it belongs, or will they maintain their spending levels by eroding the remaining principal sum in the endowmwnt or by raising tuition. The announced freezes and chills and 5% budget decreases wont cut it when you are looking at losses of 50% and decades of overspending.</p>

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<p>I just had a look at John Maudlin's column where he talks a little about all of the kids coming out of college looking for jobs in the financial industry, ideally to be money managers and traders. This as the financial industry is shedding tens of thousands of jobs and where the overall pool of money is shrinking. Competition for these jobs will be fierce. He makes the case that one should be aware that they are competing with very, very smart people out there in trading their own account. I like to trade my own account as I don't have to trade every day. I don't have to be invested every day. I just look for low-risk opportunities these days and exit when the profits are good enough. This approach has worked well for me the past few months.</p>

<p>These professional managing endowments do it for a living and it seems like they always want to be invested and in stuff that will allow them to hit it out of the ballpark at the cost of liquidity. I don't have any Ivy League degrees, high-power connections and insider information but these guys sound just plain stupid to me. They were basically right until they weren't. That's happened to me too. But when I stop being right, I just get out. Sometimes it's nice to be the little guy.</p>

<p>I take it that these guys coming out of college have been taught these systems for managing money that may be useless now.</p>

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<p>Mia, I don't think anyone is saying that the endowment covers over 40% of what it should cost to run a college-we are just saying it is. I would totally agree with you-all you have to do is compare how much the big-time schools spend per pupil versus good smaller colleges like Bowdoin or Davidson.
Problem is they are spending that much and someone or something is going to have to take a big shave.</p>

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<p>I agree that Universities spend a lot of money on things that do not appear to be related to instruction, and among these things there are likely things that could be cut without harming the student experience. </p>

<p>But it's not all bloat. </p>

<p>Some of those expenses result in a University that is more prestigious, more resource-rich, and more appealing for undergrads--like development, for example. Some of those expenses represent things you couldn't run the university without. For example, look at the latest Higher Education Opportunity Act. How do you fulfill all those reporting requirements without staff (all or most of whom are going to be non-instructional in nature)? How do you recruit that staff without benefits and pensions? </p>

<p>I feel like government and the public sometimes speak out of both sides of their mouths. They complain of bloat and gripe about institutions not focusing enough on undergraduate instruction. Yet schools are taken to task if they don't have great websites, wired dorms, super rec facilities, available staff, public reporting of data, high-performing endowments, state-of-the-art security systems, etc. Those things don't just happen--they take money and staff.</p>

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<p>Here's something that doesn't make any sense to me. If Columbia's endowment is only down 15% and Yale's is only down 20-25% then thats not that bad compared to the market. Then why don't they take 5-6% from their endowment like they ordinarily do. Why are they all going out and borrowing at pretty high rates billions of dollars. It seems odd that you would borrow money when you are sitting on over 20 billion in your endowment like Harvard and Yale.</p>

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<p>I always thought the idea behind borrowing was that your investments were making more of a return than the interest would be on the borrowed money. And if you can get credit, the current rates are beyond low. And right now, most losses are paper losses and aren't truly realized unless you sell or otherwise liquidate.</p>

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<p>Because they are heavily invested in non-traded investments that require additional capital infusions and are not marketable at this time except at a large loss. They rather hope that time bails them out of these deals. Or they could just be throwing good money after bad.</p>

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<p>expanding on "Yale innovated this investment strategy for endowment funds and literally wrote the book on it. [I forget the name of the book but you can find it easily if anyone's interested] Harvard copied Yale. So did MIT. When MIT brought in a new president a few years back from Yale, she brought over a person from the Yale endowment fund to run MIT's. Now there are many of the top endowments with these alternative, illiquid investments in timber, oil in tankers, real estate, hedge funds etc."</p>

<p>The party line sold by the TIMOs (timber investment management organizations) was that long-term endowments should and could place their investments in the timber. Matching investment maturity with cash need maturity was all the rage. Trees grow at about 5% per hear = equals 5% return on investment, plus residual value to the land . </p>

<p>The problem with this theory is multifold. </p>

<p>--The timber/paper companies saw sucker coming and charge 2 to 4x realistic price to the fancy guys from the universities. </p>

<p>--the TIMOs charge 1 to 2 percent per year management fee so the 5% becomes 3 percent.</p>

<p>-- And then if you want to harvest, the forester and timber surveyor will take a cut in order to get your permits.</p>

<p>-- And then the timber needs "thinning to increase long term productivity" so the logger takes out huge amount of product and charges the landowner for the privilege.</p>

<p>-- and there are taxes every year.</p>

<p>-- and then 20 years later, paying fees and taxes and overhead year after year, one harvests and low and behold, "the market price for time is down. Sorry."</p>

<p>Because all the university and long-term money funds got on board, they started selling land to each other, creating a bubble in timberland prices. Among universities and Prep endowments it was the newest sexiest thing. Prices spiraled up - and are unsustainable - and scariest of all un-appraisable. </p>

<p>These universities and endowments are going to take a bath on timberland -</p>

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<p>I looked into a commodity stock play many years ago in Europe that included timber (anglo-american I believe) and it sounded like a good idea at the time. It did quite well until 2007. It's down about 75% from there. I exited quite some time ago as I got unhappy with african investments in general.</p>

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<p>Barrons, Why then is the Yale investment guy talking up the fact that he is now investing heavily in distressed debt. Where is that money coming from. Something is not adding up here.</p>

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<p>Just saw an outstanding article in today's Barrons titled Ka-Boom. Really explains well what is really happening inside alternative investments with the basic story line being that what these private equity/hedge funds are reporting in performance doesn't reflect reality at all.</p>

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<p>Link to Barron's article. Signals endowment losses more likely over 50% for PE/HFs</p>

<p>Private-Equity</a> Business Faces Its Biggest Crisis Ever - Barrons.com</p>

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<p>This begs a couple of simple questions that should be addressed to these guys making millions of dollars managing billions of dollars of donor money:
1. How do you determine what these alternative investments are worth?
I think the answer to this would be the funds that we invest with tell us what they are worth.</p>

<p>Which begets the critical question:
2. What gives you reason to believe that what they are telling you their stuff is worth actually is worth that much? I'd be very interested in their answer to this.</p>