November 8, 2012

Cornell Sees Second Lowest Endowment Returns Among Ivy Schools

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After seeing two consecutive years of double-digit growth, Cornell’s endowment return took a nosedive in the 2011-12 fiscal year, just breaking even with a 0.14 percent gain, the University reported Wednesday.

Citing economic volatility, the University said that, as of June 30, the value of its endowment had dipped from $5.35 billion in fiscal year 2010-11 to $5.23 billion in 2011-12. The endowment shrunk because the University spent more of it than it earned from investments and philanthropic gifts over the same period.

The results dealt a blow to the University’s hopes that its endowment was climbing back up to its pre-recession high of $5.8 billion.

Cornell, however, was not the only school to see a steep fall in its endowment returns over the last fiscal year. Nationwide, colleges reported, on average, a negative 0.3 percent return in their endowment in the 2011-12 fiscal year — a drop from a 19.2 percent return in the 2010-11 fiscal year, according to preliminary data released by the National Association of College and University Business Officers.

The University’s modest gain in 2012 will cut a slice out of the revenues Cornell typically earns from the endowment. According to the University, payouts from the endowment represent about 11 percent of Cornell’s total annual revenues and support programs touching all parts of campus, from financial aid to University operations.

Despite the fall in Cornell’s endowment’s return, Chief Investment Officer A.J. Edwards defended the University’s financial performance. Edwards said in a press release that, over the last 10 years, the rate of returns on Cornell’s endowment has increased 7.3 percent.

He added that the University’s endowment return is “within the performances of the endowments of Cornell’s peers.”

Among Ivy League schools, however, the University only outperformed Harvard, which saw a negative 0.05 percent return in Fiscal Year 2012. Cornell, which was the last Ivy to announce its endowment returns, trailed all the other Ivies. Dartmouth College’s 5.8 percent was the highest return in the Ivy League.

In explaining its financial performance, the University has cited turbulence in the economy: slowing growth in China, financial crisis in Europe and an impending “fiscal cliff” in the U.S.

“While traditional measures of volatility are at historically low levels, it would be an error in judgment to think that all is well and there is nowhere to go but up,” Edwards said at the end of the fiscal year. “With all of the uncertainties in the markets today, we are keenly focused on risk as much as, if not more than, return.”

That heightened focus on risk management, which stemmed from Cornell’s endowment plummeting during the recession, has pushed the University to further diversify its investment portfolio. Its financial strategy hinges on trying to balance bolstering its liquidity — cash needed to pay debts or cushion the University from unusual circumstances — with longer-term investment opportunities, Edwards said in a quarterly report.

The University currently invests its endowment in the U.S., international and emerging markets equities, hedge funds, national resource-related investments and real estate, along other markets.

Some of its lowest investment returns for Fiscal Year 2012 came from investments abroad in emerging markets, or rapidly growing nations, according to its fourth quarter report.

From 2011-12, Cornell saw a negative 12.3 percent return on its emerging markets portfolio. Although the University gained from investments in Turkey and the Philippines, it said in a report that those gains were offset by losses in China and Russia and a “difficult investing environment.”

Additionally, the University said that “increasingly negative economic news from Europe, China and the U.S. sent stocks down sharply” during the fourth quarter, leaving it with a negative return of 13.6 percent in its investments in international developed equities.

Cornell’s strongest return in Fiscal Year 2012 lay in private equity, or investments in privately held companies, which posted a 4.8 percent gain and accounted for 0.2 percent of the University’s total endowment returns. The first half of the fiscal year was “an active and profitable period for private equity investors,” the report said, noting that companies like Facebook, Dropbox and Instagram boasted “lofty” valuations.

Edwards projected his optimism for the University’s endowment performance.

Moving forward, the University’s investment portfolio is poised to “take advantage of opportunities in Europe and/or the United States, as well as across emerging markets and commodity-related sectors,” he said.

Original Author: Akane Otani