This is the second part of a series delving deeper into the economic crisis and its effects on higher education, particularly at Cornell.
Despite having an “all-weather portfolio,” Cornell’s $6 billion endowment is not immune from the financial storm that is sweeping across the nation.
The endowment acts as a stable source of funds for the University, and nearly all of the money is invested long term. Cornell’s endowment makes up about 11 percent of the University’s revenue.
Since mid-2003, the endowment has enjoyed double-digit growth rates and it even surged to a 10-year record high of 25.9 percent in the 2007 fiscal year. But in the last fiscal year, which ended on June 30, the University recorded the lowest endowment growth rate in five years at only 2.7 percent, according to a statement from President David Skorton in late September.
Furthermore, C.U.’s endowment is expected to shrink, Skorton told Bloomberg News Service a month ago. But the magnitude of this contraction is currently unclear. The endowment’s performance from July 1 to Sept. 30 will not be revealed until the end of next week, after Chief Investment Officer James Walsh meets with the Board of Trustees’ Investment Committee.
Despite the fluctuations, Walsh seems confident about the endowment’s future prospects.
“Endowments are long term investments, and as such see lower asset prices as an opportunity not a threat,” stated Walsh in an email.
In addition to revenue loss from the endowment, some other funding sources are also expected to shrink. The $170 million in state funding, which makes up about 6 percent of the University’s revenue, has already been slashed by $3 million this year. But new cuts may be three times as large.
Tuition, which makes up nearly a quarter of Cornell’s revenue, is expected to increase.
“I’m sure we will raise tuition,” Skorton told Bloomberg. “We will give very careful consideration to do it as moderately as possible.”
While Cornell’s “all-weather portfolio” has reached out internationally, C.U. moved investments from traditional stocks and bonds and put them into more volatile alternative investments, The Sun reported last November.
These alternative investments, such as private equity, real estate and hedged equity make up at least 41.7 percent of Cornell’s portfolio. Although they had enjoyed enormous rates of return prior to the recession, they were all “hit hard” in the recent crashes, according to Reuters.
“The increase in exposure to alternatives is not a new phenomenon, but has taken place over a number of years. Investors who came late to alternatives, and then increased exposure aggressively, have been the hardest hit. We are not in that camp,” stated Walsh, who accredited the endowment’s record-high gains to the “astro-
nomical” growth from alternatives last November.
While Cornell sold some of its private holdings last year in a much stronger market, it has no plans to sell any right now, according to Walsh. At the same time, Harvard University, which announced a historic 22 percent plummet in its endowment value on Monday, has been trying to rid itself of its private equity holdings, according to the International Herald Tribune. A few other universities, such as Duke and Columbia, are also contemplating selling their private equity holdings.
Walsh believed that the financial crisis’ impact on endowments is “far less pronounced” when compared to other types of investments. In recent years, he explained, as asset prices have been high and the return for taking risk low, some investors have excessively financed their investments with leverage, or debt. As endowments usually do not leverage at such levels, the effect of the crisis is expected to be relatively small.
But it appears that Walsh’s optimism is not shared by many. Moody’s Investors Service, a bond-rating agency, had recently forecasted a 30 percent decline in the value of college and university endowments in the current fiscal year, according to The Chronicle of Higher Education.
This ominous prediction came true for Harvard University’s $36.9 billion endowment. Its loss of 22 percent amounts to more than $8 billion, which is larger than the sum of Cornell’s total endowment. Echoing the most recent trends of Cornell, Harvard’s endowment recorded an impressive growth of 23 percent two years ago and a much milder growth of 8.6 percent last year.
Historically, Cornell’s endowment suffered from slow or negative rates of return during the last US economic recession from 2001 to 2003. But at the same time, the University was also more generous with spending the endowment’s investment returns.
Under law, Cornell is forbidden to spend the principal value of the endowment, but it can spend a portion of investment returns. This amount, also called the payout, climbed during the last recession from a rate of 4.3 percent in 2001 to 6.7 percent in 2003.
The current year’s payout, determined before the collapse in Wall Street, is set at 5.5 percent. This is higher than the 10-year average of 5.1 percent. Executive vice president Stephen Golding explained that this adjustment was made to support Cornell’s enhanced financial aid initiative announced in January.
It is currently unclear as to whether the University will increase its payout rate in the next few years. While Cornell is one of the many universities that have announced a staff hiring freeze, it is also one of the few, if not the only university that has announced a further expansion in its financial aid after Wall Street tumbled.
“Accessibility to Cornell for students from all socio-economic groups is one of the administration’s highest priorities. Cornell is committed to honor the commitment it has made to its students and families, while working to protect this very important asset to the institutions long-term stability,” Golding stated in an email.
Nearly a third of the endowment payout is used to fund academic programs, while almost a quarter of the sum helps to finance student aid. About 16 percent of the endowment payout is also used to support professorships, according to the University’s response to a questionnaire issued by the Senate Finance Committee in January.
Paul Gould, chairman of the Board of Trustee’s Investment Committee, could not be reached for comment.