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University endowments fell 18.7 percent in 2009

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Ret Boney

In the fiscal year that absorbed the worst of the recession and market volatility, college and university endowments lost an average of 18.7 percent on their investments, a new study says.

That result for the year ending June 30, 2009, is worse than the three percent loss for fiscal 2008 and a complete turnaround from 2007’s average gain of 17.2 percent, says the report from NACUBO and the Commonfund Institute.

“This has been the worst return since the great depression,” says Verne Sedlacek, president and CEO of Commonfund, noting that the previous low point was a loss of 11.5 percent in 1974.

While that performance is disappointing, the Standard and Poor’s Index, a general barometer of the financial markets, plummeted 26.2 percent over the same time period, he says.

The study examines 842 U.S. colleges and universities, which together reported $306 billion in endowment assets.

The disappointing year, coupled with fiscal 2008, brought the 10-year average return down to four percent.

“That’s a cause for concern,” says John Griswold, executive director of the Commonfund Institute. “Unless you have a fairly robust development department, rebuilding these endowments will be a real challenge.”

In an extremely rare occurrence, smaller endowments outperformed the behemoths, whose size and sophistication typically provide them a natural advantage.

Institutions with assets under $25 million lost an average of 16.8 percent on their investments, while those with more than $1 billion lost 20.5 percent.

Harvard University, home of the nation’s largest endowment, saw a loss of 29.8 percent, finishing 2009 with assets of $25.7 billion, down from $36.6 billion in fiscal 2008.

Yale University was close behind, losing 28.6 percent and finishing the year with $16.3 billion in assets, down from $22.9 billion the year before.

A handful of schools posted modestly positive returns for the year, primarily because their holdings were invested in fixed income and cash.

Investment returns for the year were down for all asset classes except fixed income, which earned three percent, and short-term securities and cash, which returned 0.8 percent.

The worst performance was posted by international equities, which lost 27.6 percent, followed by domestic equities, which lost 25.5 percent, and alternative strategies, which lost 17.8 percent.

Fiscal 2009 saw shifts in a few asset classes, with allocations to domestic equities falling to 18 percent from 23 percent, international equities falling to 14 percent from 18 percent, and allocations to alternative strategies growing to 51 percent from 46 percent.

The spending rate averaged 4.4 percent for all institutions last year, with about 43 percent increasing their rate and 25 percent reporting lower rates.

Six in 10 universities say gifts to their institutions fell in fiscal 2009, down a median 45.7 percent, with only 26 percent reporting growth in gifts.

“The real challenge isn’t so much in recovering endowment value, it’s in recovering revenue in the form of public support,” says Griswold. “That’s not a recovery pattern that’s likely to be a swift as the market recovery. We think that for our public institutions that rely on support from their states, we’re several years off from a return to pre-recession levels of support.”

Debt, on the other hand, grew last year, with average total long-term debt of $167.8 million at the end of fiscal 2009, up from $109.1 million the year prior.

Despite the difficult financial year, colleges and universities are continuing to move forward, says John Walda, president and CEO of NACUBO.

“Higher education has dealt very effectively with the challenges they’ve had,” he says. “We can expect to see more and read more about continued challenges as institutions work through where they’ve come from.”

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