Jan. 22, 2007

The Rich on the Rise in Endowments

College endowments rose for the vast majority of institutions in the 2006 fiscal year, with an average rate of return of 10.7 percent, according to data released today by the National Association of College and University Business Officers. The data come from 765 institutions in the United States and Canada. Only 14 colleges saw their endowments shrink.

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Harvard University’s endowment, by far the biggest in higher education, grew more than any other and now totals $28.9 billion. Just the increase alone in Harvard’s endowment ($3.4 billion) is greater than the combined total endowments of the bottom 188 institutions detailed in the report.

This year’s returns represented the fourth straight average increase for college endowments, and were up slightly from the average gain of 9.3 percent in 2005. But Jessica Shedd, director of research and policy analysis at NACUBO, said that it was difficult to pick out a particular reason for the yields. Instead, she said that endowment watchers should focus on trends that have continued for the last 10 years.

“One thing that stands out is the continued move to alternative investments,” she said. Shedd explained that universities, especially those with large endowments, are moving away from traditional investments in stocks and bonds and putting more of their money in hedge funds and natural resources.

Over all, institutions still place around 78 percent of their investments in stocks and bonds, but the proportion of assets in alternative investments has more than tripled over the last decade, from 5.4 percent in fiscal year 2007 to 17.3 percent of portfolio worth in 2006.

“The larger endowments have led the charge, but now you see smaller institutions following suit,” she said.

By far the most popular of these alternative investments are hedge funds, which represent 22 percent of the investment portfolio for endowments worth more than $1 billion. In contrast, smaller endowments of less than $25 million invested just 2.6 percent of their assets into hedge funds.

Shedd said that hedge funds require more attention and high initial buy-ins, so they are better suited for institutions with large endowments and investment staff with time and expertise to manage the money.

A couple of institutions stood out. The Massachusetts Institute of Technology posted significantly large returns, with a percentage increase in assets of 24.7 percent. Financial officers at the institution declined to comment on MIT’s endowment, but a press release from last October stated that the results came from strong investment performance and gifts. Investments were spread across a diverse portfolio of real estate, real assets, private equity and international equities. Strong performance over the last 10 years has allowed MIT to more than triple its spending from the endowment.

Emory University posted better returns this year than last, when the endowment fell by 3.5 percent. This year, Emory’s endowment grew by 11.3 percent, to a balance of $4.9 billion. One factor in last year’s dismal returns was poor performance by Coca-Cola, which is based in Atlanta. Emory has benefited greatly over the years from benefactors who have donated Coke stocks, driving the university’s growth, but the stock’s slippage in recent years has taken its toll.

Mary Cahill, chief investment officer for Emory, shied away from commenting on the performance of Coke’s stocks and how that has affected the endowment. Instead, she said, “Our portfolio is fully diversified.” She added that Emory has benefited from high performing investments in energy, international equities and real estate.

Following are several tables that show some of the highlights of the NACUBO survey:

Top 20 Endowments

Top 10 Public Universities

Top 5 Liberal Arts Colleges

Top 5 Community Colleges

— Paul D. Thacker

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