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Poorly endowed: Higher ed suffering from inconsistent markets

February 12, 2013


Ron Wirtz Editor, fedgazette
Poorly endowed: Higher ed suffering from inconsistent markets

In a time of tightening budgets, higher tuition and rising student debt, many large universities are looking to their foundations to provide resources to pad institution budgets and offer some financial help to students. But volatile markets have meant many are unable to do more than they could before the recession, based on annual endowment figures from the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute.

Ninth District states, including the Upper Peninsula of Michigan, are home to more than 40 higher education endowments with over $5 million in assets, and 18 with over $100 million in assets in 2012 (and the subject of this post). The two largest endowments—by far—are those attached to the University of Minnesota and the University of Wisconsin, with $2.4 billion and $1.8 billion in assets, respectively. But a small majority of all endowments—including among this subset of larger endowments—lie with private colleges and universities.

Like anyone else invested in equity markets, the large majority of these 18 larger endowments at Ninth District higher education institutions have had a rough go of late. Among the group, two-thirds saw asset levels decrease in 2012 (see table, first data column); of the six that increased, only two saw a rise of more than 2 percent.

However, there might be more than immediately meets the eye here, because changes in endowment assets are the result of more than investment returns (which were not reported by NACUBO). Endowments are not static accounts; they regularly seek contributions from alumni and others, and are typically required to distribute up to 5 percent of their assets annually (and neither variable is reported by NACUBO).

Suffice to say that endowments are not in the business of getting smaller, and investment gains plus contributions have not been high enough to offset annual distributions at many higher education endowments. In fact, more than half of the endowments have lower asset values now than in 2007 (see second data column in table; asset values for three endowments in 2007 were not available). And it can happen to the best. Even Harvard University’s endowment—easily the nation’s largest at $30.4 billion—has struggled. Last year the fund’s assets shrank by 4 percent and stood well below the fund’s 2008 peak of $36.5 billion.

But endowment performance since 2007 among the 18 large endowments has varied wildly—from a 16 percent loss for Lawrence University, a small liberal arts college in Appleton, Wis., to a 33 percent gain for the University of South Dakota Foundation, whose success must lie outside of its investment prowess. While investment returns for the USD Foundation have consistently outperformed market benchmarks, according to foundation records, neither are they high enough to explain its outlier performance.

Endowments in higher ed -- 2-12-13

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.