Feb 8, 2009

Endowment performance in 2008

NACUBO is the National Association of College and Business Officers. They report statistics on endowment size, performance, and asset allocation. Their 2008 endowment studies are available here and overall, they reported an annual return of -3% for 2008. However, the fiscal year for this report runs through June, not December. They also reported a further 23% decline for the first five months of the 2009 fiscal year - from July through November. Things will probably look even worse once December and January's results are included. It is striking to think that professionally managed, highly diversified portfolios, many over a billion dollars, can take such a substantial hit when the market heads down.

They also report on asset allocation by endowment size. Not surprisingly, larger endowments have greater allocations to alternative asset classes such as private equity, hedge funds, and natural resources. It will be interesting to see when the FY09 results are published if this helped or hurt the larger endowments. The average spending rate (the funds that go to support the university's operations) averaged 4.6%. If returns don't improve, I expect this will also decline in 2009, creating a budget shortfall that will leave many universities (and eventually, students) in a tough spot.


ghostlygerbils said...

Based on my university/employer, I'd say they are already in a very tough spot. Many states (in this case, NY) have laws that prevent universities from being too flexible with endowment spending during such downturns, forcing them to make cuts. And if the university (like mine) primarily relies on its very high tuitions to pay the bills, then they're in even worse shape, because kids are apparently dropping out "by the dozens," according to a recent meeting of administrative officers here.

Basically, it's a downward spiral, like everything else. Except Spam.

Ted said...

Declining enrollment puts universities in a tough spot. But so does relying on the endowment to fund a significant portion of the operating budget - see Brandeis University's current mess. At this point, even if universities could spend a larger portion of their endowment, they'd have no choice but to sell assets (probably public equities) that have lost much of their value. This is before you get into the funds that are locked up in illiquid private investments such as real estate and hedge funds.

I hate to say it but I think higher education will be the next bubble to burst. Tuition has grown at an unsustainable rate for far too long.