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Giving - Endowment Management Chronicle Article - Endowment strategies
From the issue dated May 27, 2004 Long-Term Strategies for Endowments Can Beat Stock-Market Returns, a Study FindsBy BEN GOSE Ask most experts what is the most important factor in endowment growth, and they will probably say investment performance. But it turns out that policies on raising and spending endowment funds may be just as important, a new study has found. The two consultants at Campus Business Advisors who conducted the study concluded that a long-term strategy for increasing an endowment might be more central to achieving the desired growth than extraordinary returns in the stock market. The consultants analyzed endowment returns over the decade ending in 2003 at 12 colleges and universities in New England. "One institution had fairly average investment returns, but aggressively added to its endowment over the decade, and its endowment grew more than those with great investment returns," says Fred Rogers, who wrote the report of the study with Glenn Strehle. Mr. Rogers, a former chief financial officer at Cornell University, and Mr. Strehle, a former treasurer at the Massachusetts Institute of Technology, founded Campus Business Advisors, in Boston, in 2003. Over the decade, all 12 institutions -- 11 of which are members of the Boston Consortium for Higher Education -- stayed ahead of inflation, as measured by the Higher Education Price Index, which tracks the cost of running a college. But one college's endowment grew by about 80 percent, while another's more than tripled. Campus Business Advisors is prohibited from releasing any financial information about specific colleges. At least three of the colleges that participated in the study have scheduled a discussion of the study's findings for their governing boards, Mr. Rogers said. Although the authors found that investment results might be overemphasized in explaining endowment growth, they believe that investments are an area in which many colleges can improve. The study found that some of the Boston colleges rushed to sign up hot managers and were too quick to ditch managers who achieved poor short-term returns. Such behavior led to "buy high, sell low" outcomes that hurt long-term results. The consultants suggest in the draft paper that endowment investments should not become so extensive or complicated that they would be impossible to monitor. One institution had more than 50 investment managers, and 10 of the 12 colleges didn't analyze their investments quarterly to determine the degree to which a drift away from an agreed-upon asset allocation affected returns. "It is our opinion that fewer managers, more carefully overseen, and an asset-allocation strategy more actively monitored, will lead to better performance than a wide selection of diverse managers with no discipline for asset reallocation among them," the authors write. Mr. Rogers and Mr. Strehle believe some of those concerns can be remedied by getting investment committees of boards more involved. In the Boston Consortium study, they found that the investment committees generally had "no accountability for attendance or for the minimum number of meetings in a year." To get a better sense of what is happening nationally, Mr. Rogers also compiled a chart showing endowment growth from 1993 to 2003 for all 374 institutions that participated in both the 1993 and 2003 surveys of such growth conducted by the National Association of College and University Business Officers. The median growth over that period was 117 percent, and The Chronicle asked him to pull out a 10-college sample to illustrate the widely varying growth rates. Mr. Rogers speculates that some of the same factors affecting growth may be at work in the national sample. "There are instances where people may not take a really strategic 5-to-10-year perspective on where they're trying to go with their endowment," he says. The experiences of the institutions at the top and bottom of the 10-institution sample suggest that endowment growth is strongly related to strategy. Michigan State University's endowment grew more than 500 percent, to $592-million, which placed it at the top of the sample, and near the top of the rankings among all institutions in the Nacubo survey. Glenn Klein, director of investments and financial management at Michigan State, says three factors have fueled the growth. Roughly half of the increase relates to a shift of money that the university will need to use in the future -- such as self-insurance reserves -- from working capital to the endowment, in order to increase returns on those reserves. An additional quarter of the growth came from fund raising -- the university won $150-million in donations from private sources over the decade. The final quarter of the growth came from an investment return that averaged 12.1 percent annually over the decade. The university committed more than 20 percent of the endowment's assets to "absolute return" strategies in the mid-1990s. The approach, which involves shorting stocks (betting that they will decline) and making arbitrage investments, shielded Michigan State from the stock-market decline from 2000 to 2002. Michigan State may also have benefited from having had a modest endowment in 1993 -- slightly less than $95-million. Mr. Rogers found that the sizes of endowments in 1993 correlated with returns over the following decade. The smallest ($25-million or less) and biggest ($400-million or more) endowments had the fastest average growths, 243 percent and 160 percent, respectively. Mr. Rogers speculates that the institutions with the smallest endowments may be the most ambitious about adding to them, and even though Michigan State doesn't fall into the "smallest" category, it belongs to that category in spirit, since its endowment in 1993 was quite small relative to its enrollment (39,700 that year). Agnes Scott College, a small, private women's college in Georgia, had the smallest endowment growth of the 10 institutions in the sample. Its 38 percent increase lifted the endowment to $283-million by 2003. Agnes Scott started the decade with a large endowment -- it had $205-million in 1993, more than twice the endowment assets that Michigan State had. So the college was at a significant disadvantage in 1993 in expanding the endowment through fund raising. Not only would each additional dollar lead to a smaller percentage growth (because of the large base), but also its pool of alumni (the college enrolls only 945 students) is dwarfed by that of Michigan State. Agnes Scott raised $11-million over the decade -- less than a tenth as much as Michigan State raised. What's more, Agnes Scott's performance is heavily tied to Coca-Cola stock, the result of a large gift in the 1950s. Under the terms of the donation, the college is restricted from selling the stock unless it spends the money rather than reinvesting it elsewhere. In a written response to questions, Agnes Scott declined to provide numbers about its investment performance, but said that it had "slightly trailed" its benchmark. Coke stock, which has been a lucrative long-term investment, peaked in 1998, and remains well below that high. While the study by Campus Business Advisors assumes that endowment growth is a central goal for all institutions, Agnes Scott officials say that's not the case for them. In explaining why they lagged behind the vast majority of institutions in endowment growth over the decade, they wrote: "Agnes Scott chose to focus on its successful campaign, buildings and planned gifts -- not endowment growth." |
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