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Business Officer Magazine

The Search for Solid Ground

As results of the 2008 NACUBO Endowment Study reflect a shaky market, institution investors seek firm footing for a continuing uphill climb.

By Kenneth E. Redd

Feature Article ImageAfter several consecutive years of strong gains, the U.S. and international stock markets turned sharply negative in 2008. Investment managers faced several unexpected jolts, including the credit freeze, subprime mortgage meltdown, and slowing U.S. and world economies. These events caused investment returns to tumble. From July 1, 2007, to June 30, 2008, the overall U.S. stock market, as measured by the S&P 500 and Russell 3000 indices, fell roughly 13 percent. During the period June 30 to Nov. 30, 2008, the S&P 500 dropped an additional and astounding 29 percent. While their diversified investment portfolios have helped many college and university endowments perform somewhat better than market indices, the overall chaotic investing environment and the sharp sell-off in equities have no doubt affected the value of institution portfolios in the short term.

During FY08, the average equal-weighted nominal return for respondents to the 2008 NACUBO Endowment Study (NES), conducted by TIAA-CREF on behalf of NACUBO, was -3 percent as of June 30, 2008, compared with an average gain of 17.2 percent for 2007. (NACUBO and Commonfund Institute conducted a follow-up survey that updates the overall average performance of college and university endowments to Nov. 30, 2008. The results of this survey, which were being collected as this article was being prepared, are available at In fact, the FY08 equal-weighted average return is the lowest reported by the NES since FY02, when the average return was -6.2 percent. The median FY08 equal-weighted investment return for all NES respondents was -3.3 percent. The dollar-weighted average rate of return of 1.7 percent reflects the higher returns, on average, of institutions with larger investment pools. Due to FY08 declines, the average annual rates of return for the past three-, five-, and ten-year periods all decreased from those reported in the 2007 NES.

Sizing Up the Landscape

The 2008 NES attracted a record number of respondents, with 796 colleges and universities participating. The combined market value of respondents’ endowments at the end of FY08 was $412.8 billion, up slightly from the $411.2 billion recorded in the 2007 study. Despite overall negative investment returns, total endowment market values increased due to additional bequests and other donations to higher education institutions. On average, college and university endowments received $10.5 million in individual gifts and bequests, while investment income fell by about $1 million.

In FY08, 77 endowments—about 10 percent of respondents—were valued at more than $1 billion. These large funds accounted for 72 percent of total endowment assets. However, the vast majority of endowments remained relatively modest in size. The average endowment value in 2008 was approximately $521 million, an increase in market value (investment returns plus donor contributions, bequests, and other additions) of only 0.5 percent over the previous year. The median endowment among 2008 respondents was $87.5 million.

Overall, the range of average one-year, equal-weighted rates of return among all NES respondents spanned 4.9 percentage points among the investment-pool-size categories (see Table 1)—from -4.3 percent for institutions with investment pools of $25 million to $50 million, to 0.6 percent for institutions with pools of greater than $1 billion. Endowments at the 522 independent institutions that responded performed slightly better than those of the 274 public college and university participants, posting losses of -2.8 percent versus -3.3 percent, respectively.

Tricky Investment Terrain

The tumultuous investing environment has proven a particular challenge to community colleges and other institutions with smaller endowments. Community college endowments accounted for 0.1 percent of the total value for all 2008 NES respondents. Collectively, community college endowments represented $2,477 per full-time-equivalent student, compared with $142,237 per student at doctoral-granting universities. That number was approximately $104,000 on average for all survey respondents.

While community college endowments may not garner the same level of attention as those of four-year public and independent colleges and universities, endowment performance and the investment decisions at two-year public institutions still potentially affect many thousands of students. According to the U.S. Department of Education, 44 percent of all first-time, first-year postsecondary students begin their education at community colleges. The current investment environment and its effects on community colleges and other smaller-endowed schools could therefore have a great impact on large numbers of current and future students.

Twenty-five community and technical colleges responded to the 2008 NES. Of these, 20 reported endowments of $25 million or less. The average one-year return for the community colleges in FY08 was -3.8 percent, compared with -3.2 percent for four-year public colleges and universities. The negative investment returns faced by community colleges came at the same time that state and local appropriations for public institutions were being dramatically reduced, producing jarring effects on institutional finances.

“Our state appropriations are now below the level we received in 2000,” says Charles Thomas, vice president for business at Macomb Community College, Warren, Michigan. His institution’s endowment has suffered a major loss since July 2008, on top of investment declines of about 7.1 percent in FY08. “With these sharp declines, it may be necessary to ask the college board to fund the endowment distribution in 2009 as we did in 2002,” notes Thomas.

Keith Houck, vice president for administrative services and chief budget officer at Valencia Community College, Orlando, Florida, expresses a similar concern. The investments in Valencia’s endowment declined 4.5 percent in FY08, roughly in line with its peer group. “Our investment strategies for both college reserves and foundation funds have been tested during the past year,” says Houck. “Our college operating budget has watched nearly $1 million of investment income disappear.”

Like many institutions, community colleges have scrambled to reduce spending in response to investment losses, though most are trying hard not to increase the amount spent from their endowments to make up for reductions in investment income and state support. “At this time, our college has been able to sustain the state reductions through cost reductions and deploying of contingencies,” says Ronald Rhames, senior vice president for business affairs at Midlands Technical College (MTC), Columbia, South Carolina. MTC Foundation’s investments fell roughly 2.4 percent as of the end of FY08.

Similarly, Valencia Community College has not increased withdrawals from its endowment to make up for lost state revenue. Says Houck: “Since our endowment is primarily focused on student needs, which are also increasing, we are not tapping these resources to provide additional dollars for college operations.”

Stock Slides

Endowment Management Forum Takeaways Online

Learn the latest from endowment management experts who participated in the NACUBO Endowment Management Forum, January 28–30. Mimi Lord, senior vice president and chief investment officer, Spero-Smith Investment Advisers, Inc., captures the essence and energy of the conference in a Business Officer online exclusive at

The poor performance of domestic stocks and public real estate were the biggest drags on the overall performance of endowments for all NES respondents. As Table 2 illustrates, average investments in U.S. stocks and public real estate fell about 10 percent in fiscal 2008, while international stocks fell approximately 7 percent. On average, U.S. equity investments had a roughly -11 percent average return in the endowment size categories of $1 billion or more, $500 million to $1 billion, and $100 million to $500 million, compared with an average return of roughly -9 percent at those valued at $25 million or below. Investments in foreign equities returned about -7 percent at endowments valued at more than $1 billion, compared with a -5.8 percent average return at those valued at $25 million or less. Community colleges had the majority (53 percent) of their assets invested in domestic and foreign equities, and thus faced somewhat greater overall losses when compared with larger institutions.

On the upside, natural resources and other alternative investments and bonds offered positive returns that helped partially mitigate the relatively steep slides in stock values. On average, natural resource investments (including oil, natural gas, timber, and commodities contracts) gained about 25 percent at the smallest endowments, roughly 22 percent at the largest endowments, and nearly 24 percent overall. However, on average, less than 1 percent of endowment assets at smaller-sized endowments were invested in natural resources, compared with about 5 percent of the assets of endowments valued at more than $1 billion (see Table 3). Similarly, private equity gained nearly 14 percent at the smallest endowments and roughly 11 percent at those valued over $1 billion, but only 0.6 percent of total assets at the smallest endowments were invested in private equity, versus 10 percent at the largest institutions.

Divergent Paths

In recent years, larger endowments have continued to shift holdings toward alternative investments and away from stocks and bonds. From 2002 to 2008, the greater-than-$1 billion endowments saw their investments in equities (non-U.S. and U.S.) decline from about 45 percent to approximately 39 percent, while their exposure to fixed income investments fell by roughly one half.

During this same time period, smaller funds remained focused primarily on stocks. From 2002 to 2008, the percentage of assets invested in equities remained steady for endowments valued at $25 million or below, increasing marginally from 55.4 percent to 55.9 percent. Fixed income investments for this category dropped modestly, from 31 percent to 27 percent. While allocations to hedge funds and private equity increased, the two asset classes combined still accounted for less than 4 percent of overall investments for endowments of $25 million or less. Interestingly, the average share of assets of these endowments invested in natural resources actually declined from 2 percent in 2002 to 0.4 percent in 2008.

Among all NES respondents, the percentage of total endowment assets invested in equities fell from about 57 percent in 2002 to slightly less than 52 percent in 2008, while the share in natural resources increased from 0.4 percent to 2.2 percent. The greatest movement overall was into hedge funds. The share of assets in these investments jumped from about 5 percent of total assets to approximately 13 percent. Collectively, the percentage of endowment funds invested in equity and fixed income assets declined steadily, from about 84 percent of investment pool assets in 2002 to 71 percent in 2008. While in general more endowments appear to have diversified holdings in search of higher returns, institutions with the smallest investment pools had significantly higher allocations of their funds (83 percent) devoted to stocks and bonds than those with the largest investment pools (50 percent).

Sudden Detours

The steep sell-off in stocks that occurred after June 30, 2008, was not the only blow to endowments and their advisers. Many of the investments in natural resources and other commodities that managers used to help improve performance prior to the market downturn also fell sharply. For instance, the price of a barrel of oil declined from roughly $137 in July 2008 to about $45 in November 2008, according to the U.S. government’s Energy Information Administration.

Thanks to Our Study Sponsors

The following firms contributed to the 2008 NACUBO Endowment Study. Without their generous support, NACUBO could not publish so comprehensive an analysis of endowment management practices.

TIAA-CREF Institutional
Development and Sales

Citi Institutional Consulting
John W. Bristol & Co., Inc.

Bank of America

BNY Mellon Asset Servicing
Callan Associates, Inc.
Fayez Sarofim & Co.
Iridian Asset Management, LLC
Prime, Buchholz

Asset Strategy Consultants
Goldman Sachs Asset Management
The Northern Trust Company

Morgan Keegan & Co.

The economic and investment challenges that occurred during the final six months of 2008 came at a particularly precarious time for community colleges. Due to the overall slowing economy, two-year public schools may see even greater increases in enrollments, as many more traditional-age and older students turn to these institutions for job training as well as postsecondary opportunities.

Investment declines, along with the possible need for even greater resources from endowment earnings to help support increased student services, brought a greater emphasis on shifting to safer, more stable investments in the latter part of 2008, as money managers and community college business officers expected equity and natural resources markets to remain challenged over the near term. “The main issue for our finance committee will be the safety of investments in this volatile market,” says Rhames. “Our committee will be questioning the fund manager strategy and will be particularly focused on ways to protect the corpus of our endowment.”

Houck echoes the need to preserve capital. “We have increased our allocation to cash, specifically to CDARS [certificates of deposit that provide greater FDIC insurance protection (up $50 million) while still providing a guaranteed return]. This will help reduce overall losses on the endowment that are still being incurred by equity investments.”

Fundraising, an area in which community colleges are gaining strength, will likewise receive increased emphasis in the near term. Despite the tough market conditions, the average community college endowment saw an increase in value of 5 percent in FY08 (compared to an average of 0.5 percent among all NES respondents), largely due to increased donations and bequests. At Valencia Community College, the four-year capital campaign “has been a driving factor in our efforts to increase contributions to the endowment,” says Houck.

According to Thomas, the new president at Macomb Community College will emphasize efforts to increase fundraising. Similarly, Midlands Technical College and its foundation have developed a new capital campaign that includes targeted mailing, personal appeals, and partnering with others with common interests. “This year,” notes Rhames, “we anticipate that public resources, especially those from the state, will continue to decline. Thus, fundraising will become an even more key part of the college’s strategy to meet the needs of the community.” Similar to the fundraising efforts at many other community colleges, a major component of the MTC Foundation’s capital campaign will be to seek resources to assist students in the face of rising tuition costs.

Regaining a Foothold

Community colleges are considering other strategies to help boost their endowments during these challenging times. For instance, Macomb Community College is examining its current mix of investments and may consider additional outside advice on future investment decisions. In the meantime, the institution temporarily suspended its monthly practice of adding to its investment portfolio. Valencia Community College is relying more on the use of unrestricted funds to offset reductions in principal and interest income.

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Despite the hurdles posed by a harsh U.S. economy in 2008 and an uncertain investment outlook for 2009, institution leaders stress the importance of staying focused on the long term. Community colleges, like many other institutions, have already begun positioning their endowments for a possible recovery in equities and other markets. “Our newer investment managers believe we may be near a turning point,” says Thomas. Adds Houck: “We are focused on finding ways for the investment pool to weather current market volatility as well as being positioned to take advantage of investment opportunities when the market rebounds.”

In addition to optimism, other essentials all institutions may need to add to their investment gear this year include patience and stamina for the trail ahead.

KENNETH E. REDD is director of research and policy analysis for NACUBO.