October 18, 2001

Market Downturn to Affect Endowment in Short-Term

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Cornell officials said that the University’s endowment, which is entirely invested in the stock market, will not suffer long-term effects from the market downturn that followed the Sept. 11 terrorist attack.

“The stock market has recovered now to about the point that it was on Sept. 11. So one might say that the terrorist attack per se has not had a long run effect on the market,” said Ronald G. Ehrenberg, the Irving M. Ives Professor of Industrial and Labor Relations and Economics.

“Although economic forces were exacerbated by what happened [on Sept. 11], we don’t foresee a disaster here,” said James Clarke, the University’s chief investment officer.

Financial officers did not even need to rebalance the investments following the disaster, according to Clarke.

Although the Sept. 11 disaster did not have a significant effect on the endowment, which is a collection of gifts from donors who contribute money to the University for various purposes, the stock market decline prior to the attack has affected its value, according to Ehrenberg.

In October 2000, the University’s endowment witnessed an 18.5 percent rise to $3.4 billion. However, in June 2001, the endowment had decreased to $3.2 billion.

Harold Craft ’61, vice president for administration and chief financial officer, said that since the payout — the portion from the endowment used to fund University activities — is not a large percentage of the operating budget, a market downturn is not a financial catastrophe.

He noted, however, that “it certainly would cause some belts to be tightened somewhat across the entire campus.”

The total value of the endowment is sensitive to market fluctuations since 70 percent of it is invested in equities and common stocks and 30 percent is invested in fixed income and bonds.

Although the entire endowment is invested, the amount dedicated to bonds can be sold and converted into cash quickly.

Each month, the University receives one-twelfth of the yearly payout to use for general and specific purposes, including endowed professorships and scholarships, said Donald Fehrs, senior investment officer.

Clarke noted that, although the value of the endowment declines during a market downturn, it has always rebounded to a higher level historically.

“It’s never nice to be in a down market, but it’s something we’ve experienced before and always come out stronger,” Clarke said.

He added that the amount of money the University uses from the endowment each year remains relatively stable despite market downturns.

The Board of Trustees is involved in tweaking the endowment payout, and it traditionally stays within the typical range of four percent. If the payout value was not kept relatively constant, the University could face underfunding in future years.

“To prevent the payout from changing dramatically each year based on wildly varying market performance, [it] is generally determined by averaging the total value of the endowment over the three trailing years,” Craft said. “In the last decade or so, this has caused the payout to increase each year.”

“However, when the stock market and the endowment go down, it is more difficult for the University to increase the payout,” Ehrenberg said.

Craft said that it is expected that the payout will be more than made up by growth of the basic investments, when averaged over many years.

“This has indeed been the case on average. However, in a period of extended down-markets, it is possible that the payout would necessarily decrease,” he said. “This does not appear to be the case for the coming year, at least at this point, but a significant increase, comparable to those in the previous years, does not seem to be in the cards either.”

Growing to $3.4 billion last October, Cornell’s endowment fared better in the market than 95 percent of universities and colleges. However, fellow Ivy League universities Harvard and Yale saw their endowments grow to $19.2 billion and $10.1 billion respectively.

Archived article by Stephanie Hankin