Surviving A Wild Ride:The Impact of College and University Endowment Performance on College and University Budgets--

Today and Tomorrow

Ken ReddDirector, Research & Policy AnalysisNACUBO

Endowment Performance and Institutional Spending: Current Trends

• Endowments have become important revenue sources for colleges and universities.– Colleges and universities derive 10% of their annual operating funds from

their endowments. (14% for publics, 8% for private non-profits).• But recent economic conditions and volatility in the investment markets make

dependence on endowments more precarious.– Stock performance has been unpredictable for the past 36 months.– Institutional endowments have become less “liquid” over the past decade.– Contributions to endowments have fallen dramatically.

• What effect will market volatility, lower liquidity, and the other economic difficulties have on investment performance and institutional spending in the future?

Information About the NACUBO Endowment Study Series

• Survey conducted every year since 1971.• 2010 Study done in partnership with Commonfund Institute.• Most recent survey includes responses from 850 U.S. colleges and

universities and 23 Canadian universities.• Study participants have more than $346 billion in endowment assets

– Median endowment is $73.6 million.– 62 endowments have assets of $1 billion or more.

• For more information, go to our Web site: http://www.nacubo.org/Research/NACUBO_Endowment_Study.html

Stock Market Performance Has Been Volatile for the Past Four Years

1345 (+83.0%)

735 (-42.2%)

7/3/

2006

8/21

/200

6

10/9

/200

6

11/2

7/20

06

1/15

/200

7

3/5/

2007

4/23

/200

7

6/11

/200

7

7/30

/200

7

9/17

/200

7

11/5

/200

7

12/2

4/20

07

2/11

/200

8

3/31

/200

8

5/19

/200

8

7/7/

2008

8/25

/200

8

10/1

3/20

08

12/1

/200

8

1/19

/200

9

3/9/

2009

4/27

/200

9

6/15

/200

9

8/3/

2009

9/21

/200

9

11/9

/200

9

12/2

8/20

09

2/15

/201

0

4/5/

2010

5/24

/201

0

7/12

/201

0

8/30

/201

0

10/1

8/20

10

12/6

/201

0

1/24

/201

1

3/14

/201

1

5/2/

2011

0

200

400

600

800

1000

1200

1400

1600

1800

S&P 500 Index*(July 2006 to May 2011)

1277

*Includes reinvested dividends.

Annual Endowment Returns Have Been As Volatile as the S&P 500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

12.1%

-3.5% -6.2%

3.2%

15.3%

9.3%10.8%

17.2%

-3.0%

-18.7%

11.9%

Avg. Annual Higher Education Endowment Investment Returns*, 2000 to 2010

*Net of all fees and expenses

Larger Endowments Had Greater Long-term Returns

0

2

4

6

8

10

12

1412.2 11.9 11.9 11.8 12 11.6

53.6 3.3 3.3 2.9 2.8

One Yr Rtn (%) Ten Yr Rtn (%)

Avg. One- and Ten-Year Annual Rates of Return*, by Endowment Size

*Net of Fees.

At About the Same Time, Endowment Have Become More Invested in Illiquid “Alternative” Strategies

2001 2003 2005 2007 2010

U.S. Stocks 36% 32% 28% 23% 15%

Foreign Stocks

14% 14% 18% 21% 16%

Bonds 21% 19% 16% 11% 12%

Alternatives** 27% 33% 36% 42% 52%

Cash & Other 2% 2% 2% 3% 5%

Asset Allocations* for College and University Endowments, FY01 to FY10

*Dollar weighted. **Hedge funds, private equity, commodities, etc.

Gifts and Other Donations to Endowments Fell Sharply

Revenue Source Avg. in FY08 (in millions)

Avg. in FY10 (in millions)

Pct. Change

Individual Gifts & Bequests

$7,903 $5,115 -35.3%

Other Gifts (Corporations, etc.)

$764 $393 -48.6%

All Other Additions to Endowments

$5,013 $3,164 -36.9%

Gifts and Other Contributions Received by College & University Endowments, FY08 & FY10 (in Current Dollars)

Due to These Losses, Many More Institutions Report Endowment Funds that Are “Underwater”

Ove

r $1

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$501

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$101

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illion

$51

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1216

2.1 2 3.76.2

3.2

9.7

4.6

9.8 11.113.3 14.5 14.5 14.7 13.6

Pct. Of Endowments Underwater, by Endowment Size, FY08 and FY10

FY08 FY10

As a Result, Many Institutions with Smaller-Sized Endowments Reduced Their Endowment Spending Rates

Ove

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$501

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All Ins

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6 4.6 4.9 4.4 4.7 4.3 3.9 4.45.6 5.7

4.9 4.6 4.1 3.54.5

Endowment Spending Rate (%), by Endowment Size, FY09 and FY10

FY09 FY10

How Have the Endowment Losses Affected Colleges and Universities?

• Experienced shortage of cash

“To preserve liquidity, the university has slowed capital spending and other new initiatives…”– 30% of institution with endowments over $1 billion took some action in anticipation of

a “liquidity squeeze.” – Ended “no-loan” institutional aid programs.

• Increased borrowing

“ During the two previous fiscal years, the college found it necessary to borrow the maximum amount allowable within its revolving line of credit….”– 29% of institutions increased long-term debt (but 58% reduced debt.)

• Rebalanced investment portfolios– 82% of institutions rebalanced their portfolios, most to preserve liquidity, change

investment that lost money, or to reduce risk until financial markets become more stable.

Possible Effects of Continuing Economic Uncertainty on College and University Endowments in FY11 and Beyond

• Challenge to balance need for liquidity today with growth for tomorrow.

• Increased reliance on endowments to support institutional budgets– Especially to support increases in financial aid.– State and other support for higher education will likely remain stagnant at

best.

For further information, contact:

Ken Redd, Director, Research & Policy Analysis, NACUBO (KRedd@nacubo.org)