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University endowments plunge with stocks

Stock market fluctuations may not trouble the minds of many students, but each day, as the stocks rise — and, these days, more often plummet — universities nationwide take note. That’s because a part of their funds is tethered to Wall Street’s performance, and in an economic recession, it can mean fewer dollars to help enhance students’ quality of education.

It’s not just a couple dollars slipping out of universities’ proverbial piggy banks, either. At USF, it’s an eight-figure loss — totaling about $90 million.

From July 1 through Nov. 30, the average university’s returns declined by 22.5 percent, according to the National Association of College and University Business Officers (NACUBO). Collectively, that’s a loss of $94.5 billion across the 791 institutions NACUBO studied.

This is one instance where many state universities would rather not meet or exceed national standards. For many of Florida’s public universities, however, they’re right on

That includes USF, which has seen its returns decrease 6 percent over the last fiscal year — ending June 30 — and in the six months following that, the endowment’s return on investment is down 23.9 percent.

In June, USF’s endowment was valued at $360 million. By Dec. 31, it dipped to $268.4 million, according to information released at Friday’s USF Foundation board meeting.

The University’s fundraising arm, the USF Foundation, had a record number of pledges and gifts during the last fiscal year. If those losses hold true, however, the $81.5 million the University expects to gain will still be $4.2 million shy of the money lost in the past six months.

Though many officials expect the losses to continue, USF Foundation Chief Executive Officer Joel Momberg said the University is ready to weather them.

“Everybody’s worried in this economy,” he said. “But we prepare for years like this with the way we invest. It’s not like the sky is falling.

Building a base of money

Most colleges and universities have an endowment, which is essentially a pool of funds donated to the institution that are then invested so the school can reap a portion of the returns — the money earned from investments that have grown.

While the majority of the returns are re-invested so the endowment’s growth can exceed the rate of inflation, a percentage is used to fulfill USF’s “current needs,” as determined by the University’s Board of Trustees, according to the USF Foundation 2007-2008 performance report.

Like many other universities in the state, USF decided Friday to lower its spending rate, dropping it from 4.25 percent to 4 percent to help minimize the whittling away of the endowment.

“We’re in the business to be here forever — we don’t want to spend the endowment down,” said Bob Holmes, University of Central Florida chief executive officer.

UCF’s spending rate is 4.5 percent for this fiscal year, but Holmes said continuing that rate — or increasing it — would only contribute to the endowment’s losses, should the investments continue to decline.

Similarly, Florida Gulf Coast University has downsized its spending rate from 5 percent to 4.5 percent. The 11-year-old university has seen the value of its endowment tumble from about $48 million to $36 million from July to December, said FGCU University Advancement Vice President Steve Magiera.

Withering endowments

The universities’ losses aren’t the result of one poor investment. On the contrary, university endowments tend to have very diversified portfolios, keeping their money in a range of assets.

“It’s a way of protecting the endowment,” said USF Foundation Chief Financial Officer Rob Fischman. “If you give a student an endowed scholarship, for example, you’re making a four-year commitment to provide money for that student. You can’t renege
on that.”

USF, like most universities, has an investment committee that sets goals for acquiring funds and oversees a team of investment managers who are in charge of managing a certain portion of the University’s assets.

Instead of focusing on each year’s performance, Fischman said USF takes a more
long-term approach, focusing on its 10-year averages. Over the past 10 years, the USF Foundation performance report shows returns of 8.2 percent. However, when one breaks it down year by year, it’s easier to see the recession’s impact.

From July 1, 2006 to June 30, 2007, USF saw returns of 19.9 percent, Fischman said. During the following fiscal year, USF saw a loss of 6 percent.

Hedging their chances

To combat these declines, some universities have opted for alternative investments as a way to increase their chances of returns.

FSU, for example, has doubled the portion of its investments that are funneled into hedge funds, taking up 20 percent of the foundation’s portfolio, said FSU Foundation Chief of Staff Lori Chorey. The University lost more than $100 million from June to December, as its endowment shrank from $519 million to $401 million.

“The hit comes from our long-term investment portfolio, which is typical for most institutions,” she said. “It’s painful any way you look at it.”

USF does not intend to invest in hedge funds — a pool of investments privately maintained by a company — anytime soon, Fischman said, because of the lack of transparency the process provides and the high fees that accompany them.

“They won’t tell you where they’re investing — which is part of their strategy — and you can’t regularly check how your funds are doing,” he said. “You can only know their value as of the last date the information was released, making it harder to know exactly how the funds are doing at any given time.”

More than 90 percent of USF’s portfolio can be valued daily, Fischman said. Most of USF’s assets are invested in U.S. Equity, primarily in the stocks of major American corporations. Between 15 and 25 percent goes toward international investments, and
3-7 percent is invested in real estate, among other areas.

Scaling back

Because of the endowments’ losses, many Florida universities have begun to pare down some of their events to cut costs. FSU, UCF and USF officials said they made their donor recognition events less formal, often partnering with other universities’ departments for events, sending electronic thank-you letters instead of mailed ones and hosting events on campus to save money.

“We’re very concerned about making sure we’re not living in a bubble at this university,” Chorey said, referring to FSU’s cutbacks. “Nobody wants to go to a formal black-tie event given what’s going on in the economy.”

USF, UCF, FSU and FGCU officials said they weren’t sure their foundations would meet their fundraising goals for the next year, which varied from $17 million at FGCU to
$125 million at FSU. USF had a goal of raising $85 million, which would set a new record for the University. That figure may be revised over the next few months, Fischman said, because it was made before the stocks really started to decline.

FGCU’s annual golf tournament typically nets $85,000 to $90,000 for the university. This year, Magiera said it made $60,000, because 20 teams that participated last year couldn’t make it.

“Some of the companies don’t exist anymore,” he said. “Some of the others called and said, ‘Steve, I can’t be involved when I just laid off a bunch of people,’ which we understand. Often, instead of funding a golf team, they’d fund a player or two.”

Many also said donors weren’t backing out of pledges to give money, but more have been asking to delay or adjust payments.

“Donors understand that the money is still needed,” Momberg said. “The timing of some of their gifts is changing, but they’re still supportive.”