A downturn in the economy, coupled with bad investments in auction rate securities and other risky financial instruments has left many foundations, universities and nonprofits with record low endowments. A March 2009 study from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst performance ever at the end of 2008, losing an average of 24.1%. Previously, endowments had their worst year in 1974, with an average loss of 11%.
The Commonfund survey included 235 institutions that lost $28 billion in asset value from July 1 to Dec. 31, bringing their endowments to $87 billion. About 51% of endowment assets were allocated to alternative investments, such as hedge funds and buyout funds as of Dec. 31, which is an increase from 46% six months earlier.
The collapse of the auction rate securities market in particular has created a firestorm of trouble for many foundations and nonprofit organizations. ARS buy back programs, which were announced last summer by some of Wall Street’s biggest investment firms and banks did not cover institutional investors, only retail investors and small businesses.
As result, many foundations and nonprofits have been stuck with investment portfolios of hard to value and difficult to sell assets. Among these investments are mortgage related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.
For some entities, the plunging asset value of their endowments has forced them to close their doors. Others have reduced services or cut staff.
A March 20 article in the News and Observer offers another grim reality for universities, nonprofit organizations and foundations: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. Adding to their financial woes are state laws that prevent nonprofits from tapping into their principal.
No one can say exactly how many foundations and nonprofits are struggling with under water endowments but, by all accounts, it is grave. Says Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, in the News and Observer article: “Anecdotally, it is a serious problem. And if the current financial downturn continues, the problem will only get worse.”