Fueled by a surge in venture capital returns, the fiscal year ending June 30, 2000 left many colleges and universities with unprecedented endowment growth.
Harvard and Yale, with year 2000 endowment returns of 32.2 percent and 41 percent respectively, highlighted an Ivy League class of investors that defied lackluster general market returns and walked off with a fortune. Harvard’s endowment now exceeds $19.2 billion, and Yale is building on $10.1 billion. These two endowment leaders were more heavily invested in private equity and direct investments than many of their peer institutions.
The National Association of College and University Business Officers, which tracks the evolutions of endowments at more than 500 institutions of higher education, documented an additional $22 billion that fattened college and university banks over the last 12 months.
“The same increase in inequality in income which has happened in households in recent decades is happening in universities now,” said Ronald G. Ehrenberg, the Irving M. Ives Professor of Industrial and Labor Relations and Economics.
As a result, the salary differentials among faculty will widen, and universities will likely augment their self-help packages for students too, Ehrenberg said.
The opportunity — seen by some as a mandate — to allocate more funds into current projects stems from gains that were unexpected for many. Cornell, for one, witnessed an 18.5 percent rise in endowment funds, bringing the University’s endowment to $3.4 billion.
However, the incredible one-year growth for Harvard and Yale exceeded Cornell’s total endowment pool. Thus, while Cornell fared much better than over 95 percent of universities and colleges, the richest universities are only getting richer.
“Even though we play football with [Harvard and Yale] — and we beat them — we don’t compete for students with them,” Ehrenberg said.
All in all, Cornell’s financial planners are pleased with the University’s performance. Additionally, the investment office organizes its strategy for the life of the University, not just the immediate time period.
“We see that as a short-term phenomenon,” said Donald Fehrs, senior investment officer. “We think that our long-term gains will be comparable with any university.”
Cornell is pleased with the last fiscal year, Fehrs said, because its returns surpassed many benchmarks that Cornell monitors. The Standard & Poors 500 index, one benchmark against which Cornell measures its investment returns, increased by only 7.3 percent during the same time period.
With exceptional growth in the endowment investments, more funds may be devoted to current initiatives such as construction or new programs in the works.
“That certainly could be something that is done, but my expectation is that that won’t happen,” said Harold D. Craft, Jr. ’61, vice president for administration and chief financial officer. “Part of the [Cornell] policy says that we will pay out based on [a specific] formula or whatever the Trustees decide.”
Craft said that the Trustees are frequently active in tweaking the endowment payout, but they traditionally stay within the typical range of four percent, along with many peer institutions. If the payout were not kept relatively constant, the University could face underfunding in years that are less spectacular than fiscal 2000.
“You can get yourself into a long-term program that requires long-term support, but then the support disappears,” Craft said, illustrating his point.
“Someone has to take the perspective of balancing the future with the current,” Ehrenberg added, suggesting that the Board of Trustees deliberates on behalf of the University’s future interests.
He said, however, that the Trustees could prudently raise spending following the current returns, and it may be necessary to do so especially in light of Harvard’s rapid spending increases.
Harvard’s success has enabled it to spend more with more money on hand than it had planned for. Thirty percent of the University’s operating budget is now supported directly from the endowment. Ten years ago, that figure was closer to 17 percent.
In fact, the most difficult problem for Harvard is that “the size of our fund limits our ability to do what we’d like in venture capital,” said Jack Meyer, president of the Harvard Management Company.
A university with a smaller overall endowment could benefit much more than Harvard did, Meyer remarked, because the repercussions would spread further as a proportion of whole fund.
Still, less endowed universities that must cope with the increased risk of venture capital are taking notice. Cornell tentatively plans to raise the level of its private equity investments next year.
Many universities, such as Chicago, Duke and Notre Dame also saw increased payout rates exceeding 40 percent, but Harvard helped itself in ways other than through venture capital.
“The key thing that we are good at is finding similar securities that are mispriced,” Meyer said. “That’s why we’ve been able to add consistent value.”
While other universities generally hire outside firms to manage their money, Harvard manages its own funds and last year saw its greatest returns since 1983.
Archived article by Matthew Hirsch