University Business - January 2010 - (Page 46)

EndowMEntS 2010 If endowment managers need to commit a larger portion of their funds to cash, then returns will go down. “Obviously, there is a liquidity premium,” Courson says. “There’s always a liquidity premium.” Curry explains that cash investments have to reflect cash needs. Many institutions had part of their cash allocation invested in auction-rate notes, which were bonds with rates that were reset monthly. These seemed to be as good as cash, but they were not. Problems in the credit market made it impossible to sell or value these securities. “I don’t think anyone ever imagined a total freeze in the auction-rate market,” he says. But it happened, and it hurt both short-term investors as well as short-term borrowers. Endowment managers have often relied on cash flow from new donations to meet part of their liquidity targets. Rather than deposit the incoming cash in investment accounts, the money was kept as cash and distributed to various departments as needed under the campus budget. This allowed the endowment managers to keep the other funds in very long-term investments. But when the economy tanked, donations dried up, and that hurt the anticipated cash flow of the endowment itself and the cash flow needed for campus operations. foundations, donors, and some government funders all cutting back. Advancement officers and other campus leaders have to prove their cases now, as not only do donors have fewer resources to share, but they are also starting to ask tough questions about institutional responsibility. Poor investment performance is not evidence of irresponsible behavior, but it may inspire a new line of tough questions. “Having to answer to the constituency now is more difficult,” Courson says. The Greenwich Associates survey found that 60 percent of institutions are responding to the need for greater stewardship by demanding more transparency from their investment managers, especially in the form of more frequent information on valuation, positions, leverage, and liquidity. This is new, as many hedge funds and private partnerships have emphasized their need to keep strategies secret. The stewardship discussion may involve more conversations with campus stakeholders about the situation and educating them about what investment managers can and cannot do. At Columbia, the president has communicated through wholecampus e-mails and letters posted to the university website. “While the university has not been as negatively affected as many of our peers, it is never an easy matter to address a world that has taken a sharp turn for the worse for a great many people,” wrote President Lee Bollinger in a letter addressing the campus in May. He and other university officials have been willing to talk about its finances to reporters at the student newspaper, if not to outside media. External money managers and consultants can help in dealing with trustees or significant donors, reminds Egalka. “We feel that that’s our most important job.” The long-term challenge is to codify the endowment’s place on campus. Is it to support current spending, sustain long-term growth, or provide institutional collateral? The answer will be different at each institution, but it has to be addressed for the endowment to be managed well. Ann C. Logue is a Chicago-based freelance writer who specializes in covering finance. Poor investment performance is not evidence of irresponsible behavior, but it may inspire a new line of tough questions. Campus leaders expect endowment income to supplement revenue from other sources—especially tuition. “This meltdown was accompanied by a deep recession, and many small colleges depend on tuition revenues,” Curry says. They may experience lower enrollments as fewer families can pay their tuition bills. Griswold points out, however, that demand for higher education is increasing as well. If anything, a recession highlights the importance of education. Many nontraditional students find that unemployment gives them the time to return to school to complete their bachelor’s degree or pursue graduate work. Resources Commonfund, www.commonfund.org Greenwich Associates, www.greenwich.com Huron Consulting Group, www.huronconsultinggroup.com Lancaster Pollard Investment Advisory Group, www.chiefinvestmentofficer.com Rampart Investment Management, www.rimco.com Spectrem Group, www.spectrem.com Wilshire Trust Universe Comparison Service, www.wilshire.com/BusinessUnits/Analytics/Tucs/ universitybusiness.com Endowment Management and Stewardship Donors have less money now. No matter how loyal an alumna, a gift to her alma mater will be low on the list if she’s out of work. Some donors prefer to give appreciated assets, but little appreciates when the entire market is down. A handful of institutions have seen donors lose everything to con artists—in particular, Brandeis (Mass.) and Yeshiva (N.Y.) universities, which both had major donors who had invested with Bernard Madoff. “For charities, this is still a very tough time,” Griswold says, with 46 | January 2010 http://www.commonfund.org http://www.greenwich.com http://www.huronconsultinggroup.com http://www.chiefinvestmentofficer.com http://www.rimco.com http://www.spectrem.com http://www.wilshire.com/BusinessUnits/Analytics/Tucs/ http://www.universitybusiness.com

Table of Contents for the Digital Edition of University Business - January 2010

University Business - January 2010
Contents
Editor's Note
Company Index
College Index
Advisory Board
Behind the News
Community Colleges
Sense of Place
Viewpoint
Human Resources
Money Matters
Endowments 2010: Risk Management, Liquidity, Stewardship
Donor 3.0
Reporting for Duty
End Note

University Business - January 2010