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Articles: Endowments

Donald J. Farish is president of Roger Williams University in Rhode Island.

We are in danger of creating an environment where the “best” (meaning the wealthiest) colleges and universities are perceived to be reserved for those with sufficient status, money and influence. Everyone else is effectively relegated to struggling institutions that cost too much yet that cannot provide sufficient financial aid to meet the needs of their students.

A biomass plant opened on Middlebury’s campus in 2009, marking a significant step toward the college’s pledge to become carbon neutral by 2016.

Fossil fuel and private prison divestment may make the biggest headlines when it comes to how colleges invest endowment funds—but it’s not actually that common a practice. A growing number of colleges and universities now seek bigger impacts—and substantial financial returns—with a strategy known as “ESG.”

Finance professor Jeffrey R. Brown's new book is "How the Financial Crisis and Great Recession Affected Higher Education," with co-editor Caroline M. Hoxby, a Stanford economics professor

In How the Financial Crisis and Great Recession Affected Higher Education, Jeffrey R. Brown, a finance professor at the University of Illinois at Urbana-Champaign, and co-editor Caroline M. Hoxby, a Stanford economics professor, examine universities as complex economic organizations that operate in an intricate institutional and financial environment.

The latest NACUBO-Commonfund Study of Endowments shows college increasing spending from their endowments. (Click to enlarge)

U.S. colleges and universities last year paid for operations with bigger chunks of their endowments to compensate for declines in key sources of revenue, particularly tuition and public funding.

The good news is that the average rate of return rose for the second straight year, from 11.7 percent in FY2013 to 15.5 percent in 2014, according to the “NACUBO-Commonfund Study of Endowments,” released in January.

smoke stacks

Stop Feeding the Monster. End the Coal Age. Divest the West. Sandy Says: Divest Climate Destruction. Bound by Fossil Fuels, Freed by Action.

Messages like these have emblazoned banners on campuses across the country since’s Fossil Free divestment campaign began last November.

There are seven areas of oversight that trustees of higher education institutions should consider as fiduciaries. Mistakes in any of these areas can negatively impact the expected growth and risk profile of the portfolio, and in turn, the institution’s financial well-being.

Mistake #1: Not Tracking Total Investment Portfolio Performance

Although the legislation only applies to institutions based in New York, the New York Prudent Management of Institutional Funds Act of 2010 has led to discussion in other states about how endowments should be managed to respect donor intentions while meeting institutional needs. Some key points include:

The financial crisis is in the past, more or less, and campuses are looking ahead to a new era for their endowments. But what does this mean? Four years on, we’ve come to grips with the changes wrought by the September 2008 market crash. Finance departments are revising their theories and boards of trustees are revising their expectations under what has been called the “new normal”—a time of low stock market returns, low interest rates, and low growth in personal income.

To outperform the broad U.S. equity market, many college and university endowments focus primarily on hiring active managers to outperform a narrow part of the market, such as large-cap growth or small-cap value, while maintaining an equal allocation between growth stocks and value stocks. In addition to active management, however, these endowments should also consider taking advantage of a structural bias that exists in the U.S. equity market: the outperformance of value stocks relative to growth stocks over longer periods (the value premium).

California Lutheran University and the City of Thousand Oaks grew up together. California Lutheran College was officially incorporated on Aug. 4, 1959, five years before the city incorporated. CLU is just finishing a wonderful celebration of its first 50 years. And the same birthday is coming up for Thousand Oaks.

Future Shock

Darwin put it this way: "It is not the strongest of the species that survives, nor the most intelligent. It is the one that is the most adaptable to change." This simple truth in nature may best describe the evolution of the most nimble higher ed ownership models in the 21st century.

Westridge Capital Management, formed in 1996, promised investors enhanced cash returns by trading equity index futures. The firm's performance was so attractive, a host of pensions and endowments invested with it, including Bowling Green State University (Ohio), Carnegie Mellon University (Pa.), Ohio Northern University, and the University of Pittsburgh. In 2009, the Securities and Exchange Commission alleged that staff at Westridge invested very little client money.

It's common to find students filing papers in campus offices, restocking library shelves, or checking IDs at the fitness center to make a buck. What's a little less common is students replacing sidewalks and entranceways to dorms, building fountains, and constructing additions.

Interest in collecting payments in lieu of taxes (PILOTs) from higher ed institutions and other nonprofits is likely to grow as cash-strapped municipalities seek additional revenue, according to a new report by the Lincoln Institute of Land Policy. But the recommendation for cities and towns is to collaborate with colleges about the payments to ensure greater consistency and transparency.

Gov. Mitch Daniels recently implored Indiana's public college trustees to maximize efficiencies and cut administrative costs. Instead of coming to the "Statehouse asking for more money," as he stated, trustees should "stay back at the school and find ways to be more efficient with those dollars." As the president of Indiana's largest public college, I applaud the Governor for acknowledging how critical it is to manage costs as our state faces serious budget challenges. And we all have put some recent efforts in place, under the guidance of our trustees, to cut spending.