Wednesday, July 1, 2009

College endowments take a big hit

As expected, college endowments had a bad (fiscal) year (most just ended June 30). Interestingly, it was the smaller college endowments that did better (or less bad). (free WSJ Digg link) The median decline for small endowments was 16%, for medium was 20% and for large was 25-30%. The blame for the underperformance in 2008 is laid at the feet of the alternative investments that the big endowments have favored.

The so-called Yale approach espoused that endowments -- as long-term investors unconcerned about redemptions or short-term market fluctuations -- were the ideal candidates for alternatives. Yet in 2008, many of these assets became hard to sell, forcing schools to either dump their best-performing securities or funds, or borrow money, to meet their obligations.

Ivy League schools, more reliant on investment gains to fund daily operations, also suffered more from these drops. The average college relies on its endowment for 5% of its operating revenue, while at Ivy League schools the number ranges from 25% to 45%. That caused the type of asset-liability mismatch that has long bedeviled financial firms.

Yale does not plan to change its investment philosphy because of one bad year. And prior to 2008, for 20 years Yale averaged a 15.9% return on its endowment.