etter financial markets helped push endowments at
Harvard, Princeton, Yale and some other colleges to record levels this
year, according to preliminary fiscal 2003 year-end financial results that
many colleges released last week.
Harvard, whose endowment was already the largest in the country, earned
a 12.5 percent return on its investments in the 2003 fiscal year (which
ended June 30) helping its endowment climb to $19.3 billion. Investment
experts said the gain was not only one of the highest among colleges, but
also among large financial funds generally.
At Yale, which has the second largest endowment, an 8.8 percent return
helped push it to $11 billion. Princeton's endowment, also ranked among
the top five, earned 8 percent and grew to $8.7 billion.
While many colleges earned lower returns than these three Ivy League
giants, most showed gains this year, in contrast to the two previous
years, when their endowments fell or stagnated.
"It has been a pretty good year," said John S. Griswold Jr., executive
director of the Commonfund Institute, the research arm of the Commonfund,
a nonprofit organization in Wilton, Conn. that manages money for colleges
and other nonprofit institutions.
Mr. Griswold said the college returns were impressive in a period in
which the Standard & Poor's 500 index was up less than 1 percent and
returns on private capital investments were also small.
An institute survey this month found that the average return last year
among 122 educational institutions was 2.9 percent. The average return for
the six institutions in the survey with endowments of more than $1 billion
was 2.3 percent.
The highest return in the survey group (which did not include Harvard)
was 11.5 percent. But 15 of the 122 lost money last year, Mr. Griswold
said, with the biggest loss nearly 9 percent. He declined to identify the
institutions by name.
At the other Ivy universities, contacted on Friday, preliminary
estimates of investment returns for the 2003 fiscal year ranged from 1.9
percent at Cornell to 6.5 percent at Brown. Columbia earned 5.3 percent,
the University of Pennsylvania 4.7 percent and Dartmouth 2 percent.
Other universities reporting strong investment gains included
Swarthmore (7 percent) Duke (6.6 percent) and New York University (6.2
percent). One university that reported a loss for last year was Emory
(down 1.8 percent).
The investment return is not the only factor in determining the size of
a college's endowment; it also depends on how much the college spends and
how much it collects in donations. And at a time when state subsidies for
colleges have fallen and tuition increases have provoked sharp criticism,
endowments have become an increasingly important source of revenue.
Only a small number of the more than 3,500 colleges and universities
have endowments of any significance. The Chronicle of Higher Education
list for the 2002 fiscal year, published in January, showed only 39 with
endowments greater than $1 billion, 290 with endowments of more than $100
million and 651 with more than $1 million.
For universities with sizable endowments, however, the income earned on
them has come to represent an increasing share of their operating budgets.
Harvard's endowment income last year provided 31 percent of its $2.4
billion operating budget, up from 19 percent in 1992.
Yale's endowment income now accounts for about 29 percent of its $1.6
billion budget — a larger share than grants and contracts (26 percent) and
student payments for tuition, room and board (20 percent).
But financial experts say that while the investment gains are likely to
ease the financial pressures on colleges, they are not likely to lead to
much relief on tuition.
"The reality is that for big research universities, the endowment
influences the scope of the projects they feel they can undertake more
than the prices they charge undergraduates," said Michael S. McPherson, an
economist who is president of the Spencer Foundation in Chicago, which
provides grants for higher education research. "There is already more than
adequate financial aid for the students who need it at the top Ivies. And
institutions like Harvard, Princeton and Yale have a long list of things
they want to do to help society. The ambition always exceeds the
resources."
Harvard has performed better than the market — and better than many
other fund managers — for many years, thanks to the Harvard Management
Company Inc., its in-house investment arm, which has its own trading room
in Boston and 50 investment professionals. It manages 55 percent of its
$19 billion endowment internally and oversees the investment of the
remainder.
Although its return in 2002 was a negative 0.5 percent, and for 2001
was minus 2.7 percent, in 2000 its return was 32 percent. In all of those
years it did markedly better than most other investment managers.
Jack R. Meyer, the company's president, said Harvard kept a diversified
portfolio and had not significantly changed its asset allocation in the
past year or so. Although he would not disclose how much Harvard had
invested in specific areas, he said the "policy portfolio" that it had
determined would best meet its goals was about 22 percent bonds (domestic,
foreign and inflation-indexed) 43 percent equities (domestic, foreign,
emerging markets and private) and the remainder in commodities, real
estate and investments chosen for their absolute return or high yield.
Last year's investment strength, Mr. Meyer said, came from foreign and
domestic bonds, which returned 52 percent and 30 percent. But he said that
rather than betting on market movements, "we look for mispricings among
similar securities, arbitrage-type situations."
"These aren't immediately obvious," he said. "Typically they are very
complex, and it takes experienced eyes to see them. We have those, and
that has helped us, not just over the past year but over the past 5 or 10
years."
He said that while a 12.5 return looked "pretty good" this year, it was
still well below the returns of 20 percent or more earned in the
mid-1990's.
"If you said everything is great now, you'd be wrong," he added,
"because the real value of our endowment after inflation is still down 11
percent from where it was in 2000."
