Virginia Tech’s endowment performance saw a $78 million decline in assets, or 14 percent, despite being labeled as one of the nation’s best-managed endowments.
Tech’s performance was ranked second in the country behind Washington State University, according to John Cusimano, Tech’s associate treasurer for investments and debt management.
Endowments become especially important in times of financial distress when they are often used to offset some potential tuition increases.
The ranking is a product of an analysis conducted by 24/7 Wall Street, a financial blog. The blog used figures released by Commonfund, an investment firm for universities and other nonprofit organizations, and the National Association of College and University Business Officers to compute its rating system.
As of December 31, 2009, the preliminary market value of all endowments held by the Virginia Tech Foundation totaled $470 million.
Furthermore, the $470 million consists of 34.4 percent Global Equities, 10.5 percent Real Assets, 24.6 percent Marketable Alternative Assets, 14.2 percent Non-Marketable Alternative Assets, 10.9 percent U.S. Fixed Income and 5.4 percent cash.
Tech’s high ranking, in conjunction with its 14 percent decline in endowed assets, is indicative of a national trend in which both public and private universities have been hurt by the nation’s recession.
“In the past several years we have seen a significant drop in the value of endowments with the drop in the economy and the market,” said Paul Hassen, vice president for public affairs of the Association of Public and Land Grand Universities.
The average investment return in university endowments was a negative 18.7 percent in the 2008-2009 fiscal year that saw endowments nationwide experience their worst losses since the Great Depression.
“All sources of revenue pretty much dried up at once and still are dry,” said John Griswold, executive director of Commonfund Institute. “Many bonds basically stopped trading, and even if you had liquid treasuries, not many endowments carried those kinds of investments so they were depleted pretty quickly to transfer money over to the operating budget.”
Griswold noted that the decline of endowments, while serious, is not catastrophic.
“Endowments are there to provide annual steady income, hopefully growing overtime,” Griswold said. “They are often there as rainy day funds, and (last year) it was pouring. It was a very difficult year in all areas.”
Universities tap into their endowment funds during a recession at the same time one would see tuition raised, much like Tech has been forced to do in recent years.
At Tech, Cusimano said shifts in investment strategy, or diversification, minimized risk and maximized return.
“We resisted the urge to leverage the fund during an extended period of low return expectations,” Cusimano said. “We maintained a relatively small amount of illiquid assets, and we converted our fixed income allocation to all U.S. Treasury and Agency securities prior to the market correction.”
Leveraging the fund during an extended period of low return expectations could have given the university more bang for its buck, but also runs the risk of the investment moving against the university and creating a loss much more significant than if the investment had not been leveraged.
Illiquid assets are investments that are difficult to sell and must be converted into cash quickly because of uncertainty surrounding its value and infrequent trading. By maintaining a standard of liquidity, the university was hurt less by the market failures in 2008.
U.S. Treasury and Agency securities are often safe investments because they are debt obligations backed by the United States government for a specified time period. Treasury securities are considered to be very safe, and essentially guarantee that interest and the original amount of the investment will be paid on time.
By making changes to investment plans, Cusimano said the university should be able to effectively capitalize on future opportunities and continue its relative recent investment success.
And in its method of diversification, Tech is not alone. Griswold said in the last decade, Commonfund has seen many universities make moves in this direction.
“The purpose is to find a strategy or asset class that doesn’t move at the same time in the same direction as stocks and bonds,” Griswold said. “Now, you still have to do all the usual work on monitoring and performing good risk management so you don’t fall prey to unusual risks, particularly fraud and also risks you didn’t anticipate."
But while Cusimano indicated the university’s desire to steer away from illiquid assets, Griswold noted the imperative nature of being careful with exposure to liquid investments, indicating a delicate balance.
Liquid investments, including venture capital, hedge funds and private equity, often do not return capital for five to ten years, Griswold said. Despite the risk, these investments sometimes promise double-digit returns, making them somewhat enticing.
“That’s where some of the big schools like Harvard and Yale got caught,” Griswold said. “They weren’t getting returns because of the collapse of the economy and markets. The contracts they sign when they go into those funds require them to continue to pay capital in, but you have to make sure you have enough liquidity available.”
Strategies for investment do not change when considering a private university and a public university, Cusimano said. The common denominator in investment strategy is the size of the endowment program.
“Large programs can afford their own internal staff, allowing them to do their own research, be more nimble, and take on more risk,” Cusimano said.
And while many universities have been affected considerably by the loss of endowment funds, others have fared much better.
“It differs from institution to institution, but what we’ve seen is institutions that are highly reliant on their endowments having to cut back on programs and financial aid somewhat, to conserve the value of their endowment,” Hassen said. “Every institution has rules about how they use their endowment earnings and how much they can spend in a given year, and when returns are lower than hoped for or expected, they need to adjust how they spend those earnings.”
And though there has been a steady decline in endowments and investment returns in recent years, Griswold expressed some optimism in seeing signs of economic recovery.
However, he was skeptical regarding the slowing in the increase of the unemployment rate, noting that many individuals who are jobless have stopped actively seeking employment, thus excluding them from the statistic. On the other hand, there is a decline in the number of jobs being lost, along with several other uplifting signals.
“The housing prices have firmed up from where they were in freefall, and you can see some decent earnings in corporate America,” Griswold said. “You do still have enormous government intervention in the economy, if nothing else through free money to the banks. They are pumping liquidity in and people think that will have to be paid back in the form of higher inflation down the road.” Hassen agreed.
“I think people are hopeful of getting back into a positive mode ... the economy is starting to recover very slowly, so we would hope that endowment values would begin to increase with the economic recovery,” Hassen said.
