|Taming the Unruly Beast|
For the second year in a row the stock market is pummeling university endowments, a trend that's increasingly resulted in tumbling numbers and drastic cutbacks. Boston University, for example, saw its nest egg plummet 27 percent in fiscal year 2001 and another 13 percent in 2002. This fall BU announced $25 million in budget cuts and the elimination of 450 jobs, including 130 full-time faculty positions.
Even historically wealthy universities whose endowments suffered less precipitous declines are tightening their belts. Dartmouth saw its endowment drop 3.1 percent in 2001 and then another 5.7 percent last year - coming in far below the 10 percent return on which Dartmouth's budget was based. At its peak two years ago, Dartmouth's endowment was worth $2.5 billion; last August the Chronicle of Higher Education valued it at $2.3 billion. As a result, Dartmouth has announced plans to cut $1.6 million from its budget, putting on hold planned construction and renovation projects and reducing staff size. Officials emphasized, though, that neither financial aid nor faculty would be cut.
Such is the economic climate Brown faces as it implements President Ruth Simmons's vision for the University's academic renewal. Her proposal to expand the faculty by 100 positions and to devise a master plan for the renovation of existing buildings and the possible construction of new ones will require a solid and growing endowment. So how have the University's reserves fared in this bearish investment market?
Fairly well, according to Vice President Cynthia Frost, Brown's chief investment officer. "We tracked how the endowment has performed since this bear market began through the end of September, which was another atrocious month," she reported by e-mail. "The market peaked in March of 2000, but April was the first down month for the broad U.S. market indexes. From April 1, 2000, through September 30, 2002, Brown's endowment fell 2 percent (cumulative return, not annualized)." During that same period, Frost pointed out, the Standard & Poor's 500 Index fell 43.7 percent and Nasdaq fell 74.4 percent, while bonds, predictably, were up.
The University's numbers for fiscal 2002 showed the endowment actually up a little for the year - 0.9 percent - with a market value of $1.4 billion as of June 30. (In June 2000, by comparison, it was worth nearly $1.43 billion.)
While last year's modest growth did not keep up with spending, it did compare favorably with the performance of other university endowments. Frost's office surveyed managers of the fifty largest college and university endowments and found a median decline of 4 percent last year among the forty-eight schools that responded. "We're in the top quartile," Frost reported.
In a statement Frost released to the BAM, her staff attributed the endowment's performance to a combination of diversified equity investments and hedges. Over the long term, the statement noted, Brown needs to maintain a substantial portion of its endowment in equities to keep pace with inflation and provide for spending. Currently 71.8 percent of Brown's investments is in equities, while 28.2 percent is in hedges.
The investment office plans to continue this approach, maintaining a large and well-diversified portfolio of equities and hedges. "The portfolio may diminish in value somewhat when there is a broad falloff in equities," the statement acknowledged, "but by less than the decline in the broader market." Brown's relatively cautious investment approach has meant the University did not see the gains of a school like BU during the bullish market, but it has ensured far greater success over the past two shaky years on Wall Street.
Brown's goal, the investment office stressed, is "a portfolio for 'all seasons' that provides more stable returns, maintaining or increasing the endowment's spending power in the long run."