February 22, 2007

2006 Endowments Up

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The 2006 fiscal year was one of phenomenal growth for both public and private institutions. While Wall Street stole the spotlight with its record-breaking earnings, college endowments also fared very well.

Endowments rose for the vast majority of institutions in the 2006 fiscal year, with an average increase in market value of 10.7 percent.
Out of 765 institutions surveyed in the United States and Canada, only 14 saw their endowments shrink, according to data released by the National Association of College and University Business Officers.

The top three endowments by market value at the end of the 2006 fiscal year were Harvard’s, Yale’s and Stanford’s, coming in at $28.9 billion, $18 billion and $14.1 billion, respectively. Harvard’s endowment, which grew by 13.5 percent extended its lead as the largest in higher education. Other notable endowments were MIT’s, which grew by 24.7 percent, and UPenn’s, which grew by 21.6 percent.

Cornell’s endowment grew at a more modest pace of 14.4 percent, ending the year with a market value of $4.3 billion.

Although it is important to note that “percent increase” does not only represent the rate of return on investments, but also takes into consideration other factors such as gifts and expenditures, investment returns are the principle force behind the growth of endowments. So in practice, an endowment’s investment return should be greater than the increase in its market value, as is the case for Cornell, according to James Walsh, chief investment officer.

“All the increase in value is due to market gains last year, in fact, if you net out the gifts and the money paid out by the university in expenses actually is a slightly negative number,” Walsh said.

The robust economy aside, one of the main reasons for the high yields is a growing shift from traditional investments, such as equities and bonds, to alternative investments, such as hedge funds and private equity, according to a report by Inside Higher Ed.

“Overall, 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,” according to a report by Inside Higher Ed.

Leading this shift at Cornell is Walsh, who joined the investment office in September 2006, leaving his previous position as executive director of strategy and alternatives for Hermes Pensions Management in London, the United Kingdom’s largest pension fund.

“As far as Cornell is concerned, that [alternatives] really kicked off about four years ago. Quite a significant change has taken place in the last few years in terms of how the endowment is invested, shifting from traditional assets to alternatives. The endowment now has a very large proportion of investment managed in alternatives,” Walsh said.

“It was driven by the trustees. The investment committee did two things. They triggered a move in strategy, but they also triggered a significant increase in the staffing of the investment office. Back in 2002, the staff was five, now there are 17,” he continued.

Specifically, 50 percent of the endowment is targeted in alternative investments, with 10 percent in resources, 15 percent in private equity, and 25 percent in hedge funds.

Although alternatives are riskier than traditional investments, Walsh is committed to reducing the endowment’s risk to a level acceptable to the University by greatly diversifying its assets and building a strong team.

“Over time, I will [consider new initiatives]. The key thing for me at the moment is actually to look at the office itself and try to build the team in the office and make sure that is working at hundred percent,” Walsh said.