Tuesday, September 1, 2009

A refreshing endowment story

There has been much coverage in the press about the decline in endowment values at many of the country's wealthy universities, and the impact it has had on their operations (here's just one example). But here's a nice story about Cooper Union, which saw its endowment decline by less than 3% in the first half of the year that ended June 30, and expects the value to be flat by the end of that year.

Cooper Union is unusual in that it charges no tuition to its students (similar to Berea College, in Kentucky), so it is dependent upon its endowment to subsidize more than two-third of its operating budget. Granted, Cooper Union benefits from owning the land on which the Chrysler Building in New York sits, but it also exercised prudent endowment management that shunned some of the exotic investments that got other institutions into trouble.


  1. Don - acknowledging a small conflict of interest, it seems to me that a large part of the trauma caused by drops in endowment size relates to universities' fiscal policies (aggressive expansion of spending) rather than the investment strategy deployed. Universities seemed to set budgets assuming that 10-20% annual returns were guaranteed. Universities (along with all investors) would still be suffering had they set more conservative spending plans. However, a lot of the sting can be attributed to liabilities created in the last 2-4 years.

    Oddly, it was only two years ago that universities were being pushed by Congress to increase endowment contributions to annual budgets.

  2. I think there's a chicken-and-egg problem here -- did the universities pursue aggressive investment strategies because of the need to pour more into the operating budgets? Or did the aggressive strategies (and resulting high returns earned in the early part of this decade) push them to expand spending?

    One could argue that the large downside we're seeing now should have been expected when you investment with such a large beta. The problem is that the institutions weren't prepared for coping with the downturn in contributions to their operating budgets.