College investments dropped 23% in 2009, with U.S. colleges and universities losing a total of $93 billion in endowment value in 2009. It was the most disastrous year since 1974, when the average college lost 11.4% of its endowment, according to a recent survey by the National Association of College and University Business Officers (NACUBO). NACUBO’s study, which was jointed conducted with the Commonfund, offers several important insights.
Institutions that focused more intently on using endowment funds as a way to provide long-term economic security – and thus invested in relatively low-risk, conservative investments – fared far better in general. On the other hand, institutions that may have viewed endowment money as a mechanism to generate capital and invested in riskier types of investments paid the price.
Harvard (the richest of the institutions that participated in the NACUBO survey) lost 30% at the end of 2009, followed by Yale University at 29%. Stanford University lost nearly 27% and Texas University nearly 25%.
By comparison, New York University (which also has an endowment greater than $1 billion) suffered a 15% decline in the value of its endowment at the end of FY 2009.
As reported Jan. 28 by Forbes, Martin Dorph, the university’s senior vice president for finance, credits the relatively positive performance to the endowment’s conservative asset allocation. NYU had $780 million – or about 35% of its endowment – invested in fixed income at the beginning of 2009. Another 30% was invested in hedge funds, 25% in equities and 10% in private equity.
“The reality for NYU is that, while our endowment is large on an absolute basis, it is not as large on a per-student basis as our peer institutions,” Dorph said in the article. “Our endowment is seen as more precious because we don’t have as much.”
Harvard Ignored Warnings About Investments?
Harvard’s questionable investing strategies have been well documented in the past weeks. In a Nov. 29 article appearing in the Boston Globe, a story reports that Jack Meyer, who headed Harvard’s endowment, had “repeatedly warned” Harvard officials that the school was being too aggressive with billions of dollars in cash, “investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity.”
The warnings, however, apparently fell on deaf ears. When the market crashed in 2008, Harvard found that $1.8 billion in cash had vanished. And, today, the university is still paying the price for its investing style via tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.
Larry Summers served as president of Harvard from 2002 to 2006. He also is one of the officials who allegedly failed to heed Jack Meyer’s warnings about taking on risky investments.
In 2004, Summers entered into an interest-rate swap agreement to finance a large-scale construction project. The notional value of the swaps involved was $3.7 billion, and the contracts had the university paying a fixed rate to, as well as receiving a variable rate from, a counterparty. At the time Harvard entered into the swaps in 2004, it assumed interest rates would rise. That assumption backfired when the Federal Reserve cut lending rates to zero in the wake of the financial collapse of 2008. In turn, the value of Harvard’s interest-rate swap contracts plunged, forcing the school to come up with almost $1 billion in cash to terminate the contracts.
Harvard needed a loan and it needed it fast. As reported Dec. 18 by Bloomberg, the nation’s most prestigious institution had to ask Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit the interest-rate swaps that Summers had previously approved.
Summers is no longer president of Harvard University. He now serves as an economic advisor to President Obama, heading up the White House’s National Economic Council. Let’s hope Summers has learned a lesson or two from the decisions he made at Harvard.