Education funds in US lose big in second half of ’08

Bloomberg

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U.S. college and university endowments lost an average of 24.1 percent in the last six months of 2008, more than in any year since the returns have been tracked, according to a survey published yesterday.

Endowments with more than $1 billion weathered the year-end market collapse best, falling 21.7 percent, according to the report by Commonfund Institute in Wilton, Connecticut. Funds with less than $10 million in assets dropped 30.2 percent. Endowments had their worst full year in 1974, when they reported an average loss of 11 percent.

Investment losses since September have forced education institutions such as Harvard University and Yale University to freeze salaries, delay construction projects or borrow money to meet their budgets.

"It’s really a firestorm of bad news," said John Griswold, executive director of the institute. His center is the research arm of Commonfund, which manages $25 billion for nonprofit institutions. "Those kinds of declines in such a short time frame are very upsetting in a number of ways from the standpoint of having to test the impact on operating budgets."

The survey covered 235 institutions that lost $27.6 billion in asset value from July 1 to Dec. 31, bringing their endowments to $86.9 billion. That compared with a 28.5 percent decline in the Standard & Poor’s 500 Index, including reinvested dividends. A January survey by Commonfund, conducted among 435 schools, found they lost 22.5 percent from July through November. The S&P 500 rose 0.8 percent in December.

Harvard, the wealthiest U.S. university, said in December that its investments lost 22 percent in the four months ending Oct. 31, bringing assets to $28.8 billion. The Cambridge, Massachusetts, school projected a 30 percent loss for the full fiscal year, which ends on June 30. Harvard said last month that it’s slowing the pace of a planned expansion in the Allston section of neighboring Boston and that it’s offered buyouts to 1,600 nonfaculty employees.

The school has yet to disclose the value of alternative investments such as buyout funds and property, which take longer to price because they aren’t traded on exchanges. Harvard has sold $2.5 billion in bonds to help cover costs. Harvard Management Co., the university-affiliated firm that manages the endowment, said last month that it’s dismissing as many as 50 workers, or 25 percent of its staff, because of the losses. Ivy League rival Yale, in New Haven, Connecticut, is postponing $2 billion of construction, reducing budgets and curtailing raises for employees who make more than $75,000 annually because of a projected 25 percent investment loss in its fiscal year.

About 51 percent of endowment assets were allocated to alternative investments, such as hedge funds and buyout funds as of Dec. 31, an increase from 46 percent six months earlier, according to the survey.

U.S. stocks made up 17 percent of portfolios on Dec. 31, falling from 23 percent on June 30. Non-U.S. stocks decreased to 15 percent of assets from 18 percent. Endowment income is a key source of revenue for colleges and universities.