Surviving A Wild Ride: The Impact of College and University Endowment Performance on College and University Budgets-- Today and Tomorrow Ken Redd Director, Research & Policy Analysis NACUBO

Endowment Performance and Institutional Spending: Current Trends Endowments have become important revenue sources for colleges and universities. –Colleges and universities derive 10% of their annual operating funds from their endowments. (14% for publics, 8% for private non-profits). But recent economic conditions and volatility in the investment markets make dependence on endowments more precarious. –Stock performance has been unpredictable for the past 36 months. –Institutional endowments have become less “liquid” over the past decade. –Contributions to endowments have fallen dramatically. What effect will market volatility, lower liquidity, and the other economic difficulties have on investment performance and institutional spending in the future?

Information About the NACUBO Endowment Study Series Survey conducted every year since Study done in partnership with Commonfund Institute. Most recent survey includes responses from 850 U.S. colleges and universities and 23 Canadian universities. Study participants have more than $346 billion in endowment assets –Median endowment is $73.6 million. –62 endowments have assets of $1 billion or more. For more information, go to our Web site:

Stock Market Performance Has Been Volatile for the Past Four Years 1345 (+83.0%) 735 (-42.2%) 1277 *Includes reinvested dividends.

Annual Endowment Returns Have Been As Volatile as the S&P 500 *Net of all fees and expenses

Larger Endowments Had Greater Long-term Returns Avg. One- and Ten-Year Annual Rates of Return*, by Endowment Size *Net of Fees.

At About the Same Time, Endowment Have Become More Invested in Illiquid “Alternative” Strategies U.S. Stocks36%32%28%23%15% Foreign Stocks 14% 18%21%16% Bonds21%19%16%11%12% Alternatives**27%33%36%42%52% Cash & Other2% 3%5% Asset Allocations* for College and University Endowments, FY01 to FY10 *Dollar weighted. **Hedge funds, private equity, commodities, etc.

Gifts and Other Donations to Endowments Fell Sharply Revenue SourceAvg. in FY08 (in millions) Avg. in FY10 (in millions) Pct. Change Individual Gifts & Bequests $7,903$5, % Other Gifts (Corporations, etc.) $764$ % All Other Additions to Endowments $5,013$3, % Gifts and Other Contributions Received by College & University Endowments, FY08 & FY10 (in Current Dollars)

Due to These Losses, Many More Institutions Report Endowment Funds that Are “Underwater”

As a Result, Many Institutions with Smaller-Sized Endowments Reduced Their Endowment Spending Rates

How Have the Endowment Losses Affected Colleges and Universities? Experienced shortage of cash “To preserve liquidity, the university has slowed capital spending and other new initiatives…” –30% of institution with endowments over $1 billion took some action in anticipation of a “liquidity squeeze.” –Ended “no-loan” institutional aid programs. Increased borrowing “ During the two previous fiscal years, the college found it necessary to borrow the maximum amount allowable within its revolving line of credit….” –29% of institutions increased long-term debt (but 58% reduced debt.) Rebalanced investment portfolios –82% of institutions rebalanced their portfolios, most to preserve liquidity, change investment that lost money, or to reduce risk until financial markets become more stable.

Possible Effects of Continuing Economic Uncertainty on College and University Endowments in FY11 and Beyond Challenge to balance need for liquidity today with growth for tomorrow. Increased reliance on endowments to support institutional budgets –Especially to support increases in financial aid. –State and other support for higher education will likely remain stagnant at best.

For further information, contact: Ken Redd, Director, Research & Policy Analysis, NACUBO