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Investment Losses Cause Steep Dip in University Endowments, Study Finds

New York Times, 28 janvier 2010

mardi 2 février 2010

"Investment Losses Cause Steep Dip in University Endowments, Study Finds", TAMAR LEWIN

Pour lire cet article sur le site du New York Times

Reflecting the difficult financial environment for higher education, university endowments lost an average of 18.7 percent in the last fiscal year, the worst returns since the Great Depression, according to a study of hundreds of public and private institutions.

The study, by the National Association of College and University Business Officers and Commonfund, a nonprofit organization that manages university investments, also found that in the last year, many endowment managers increased the move from traditional fixed-income instruments and stocks into alternative investments like private equity, hedge funds, venture capital and private-equity real estate — all of which performed badly in fiscal 2009.

Unusually, the universities with endowments over $1 billion had the greatest decline, an average of 20.5 percent. Harvard, Yale and Stanford, the wealthiest universities, all lost more than 26 percent of their endowment values.

At the same time, the study found, debt rose, especially at the largest universities, and gifts declined.

The 2009 losses in endowment income come on top of an average loss of 3 percent in fiscal 2008. The three-year average return, which most universities use to determine how much of their assets to spend, was negative 2.5 percent, compared with the five-year average of 2.7 percent, and the 10-year average of 4 percent.

“We’ve had two bad years, so the endowment performance this year will go a long way to determine how quickly endowment spending will recover in the future,” said John S. Griswold Jr., executive director of the Commonfund Institute. “Most universities continue to spend at a healthy rate despite the large declines in their value.”

The study analyzed data from 842 institutions with a total of $306 billion in endowment assets.

In fiscal 2009, the universities, on average, spent 4.4 percent of their endowment assets, up from 4.3 percent the previous year. And the report found that 43 percent of the institutions had increased their spending rate during fiscal 2009, while 25 percent had decreased it, and 28 percent reported no change.

Because most universities calculate their spending based on quarterly endowment values over the previous three years, the percentage of the current assets being paid out rises as the asset values drop.

“Unless there’s a significant move in asset values, this is likely to go up over next few years, as the base goes down,” said Verne Sedlacek, president of the Commonfund.

Some members of Congress, notably Senator Charles E. Grassley, Republican of Iowa, have been putting pressure on universities with large endowments to help ensure college access by increasing their endowment spending and questioned why they are not required to pay out the same 5 percent a year as private foundations must to retain their tax-free status.

In response to the report, Mr. Grassley again raised the possibility of requiring universities to have the same payout rate as foundations, since both are allowed to accumulate money tax-free, and should be accountable for fulfilling charitable purposes.

“I hope colleges won’t rely on double-digit losses as a reason to raise tuition or freeze student aid,” he said in a statement. “Many of them relied on some risky investments, like hedge funds, to get big gains in recent years, and now those strategies are causing losses. Students shouldn’t bear the brunt of colleges’ easy-come, easy-go investment strategy. A lot of colleges still have plenty of money in the bank.”

On Wednesday in an interview, Mr. Griswold said the recent market problems illustrated why a required 5 percent payout might be problematic for universities.

“Even the most successful investors, over the long run, are averaging 6 percent, and that doesn’t take account of inflation,” he said.

In fiscal 2009, 51 percent of endowment money was in alternative investments, which tend to be less liquid, compared with 46 percent the previous year.

Institutions with endowments greater than a billion dollars had 61 percent of their investments in such alternatives last year, compared with 52 percent the previous year. In contrast, universities with endowments under $25 million had only 13 percent of their assets in such investments, up from 11 percent the previous year.

John D. Walda, president of the National Association of College and University Business Officers, said Wednesday at a news conference that with a market recovery under way, the financial picture was improving. The real challenge for many universities will not be recovering endowment values, he said, but getting back public revenues.

“That is not a pattern that is likely to be anywhere near as swift as the market recovery,” he said. “We think for our public institutions that rely on support from states, we’re several years off. The trough in state revenues usually occurs when unemployment hits its highest rate, and I’m not sure we’ve seen that yet.”

Of the institutions in the study, 60 percent reported a decline in gifts last year, with a median decrease of 45.7 percent.

The average total long-term debt of the 654 survey participants that carried debt stood at $167.8 million as of June 30, 2009, compared with $109.1 million a year earlier, with the universities with the largest endowments doing the bulk of the borrowing.