"It's a difficult time for the economy and thus a difficult time for the endowment," said President Tom Gerety.
"[The College's] endowment total return was -3.7 percent for fiscal year ending June 30, 2001," said Acting Treasurer Peter Shea.
Many other schools and the financial markets suffered significantly more severe declines. "The S&P 500 Index lost approximately 15 percent and NASDAQ was down approximately 45 percent," Shea added.
Preliminary data compiled by the National Association of College and University Business Officers (NACUBO), an organization that conducts surveys and compiles financial data on the performance of nearly 600 college endowments, suggests that colleges and universities around the nation lost billions of dollars in market value last year. The data suggests that the loss is a consequence of poor investment performance in the already weakened economy. The sector's average return on endowment investments has plummeted into negative territory. According to NACUBO, the sector's average return was -2.2 percent.
During the last fiscal year, 1999-2000, college and university endowments experienced a 13 percent average return. Specifically, the College had a one-year positive change of 43.8 percent, increasing the College's market value from $634 million to over $912 million. Amherst's strong endowment performance was complemented by a leap in endowment rank. In the fiscal year 1998-99, Amherst was ranked 68th nationally. In 1999-2000, Amherst was 52nd nationally and seventh in Massachusetts.
During the past 12 years, the wealth of some institutions has flourished. "Yale University … has more than quadrupled since 1991, to $10.7 billion," The Chronicle of Higher Education reported.
Early indicators suggest that the slowing economy and stock market weakness will create a striking contrast between last year's lucrative College investment and potentially stagnant or even negative growth this year.
"Stocks, in general, were responsible for much of the damage to endowments last year, a sharp contrast to their performance in 2000, when they helped produce double digit returns," according to an article in The Chronicle. Duke University, for example, posted a 58.8 percent rate of return in 2000, a figure that was unsurpassed during that year. In 2001, however, its investments have fallen by 4.6 percent.
Harvard University, which consistently boasts a top-five endowment rank, had nearly 40 percent of its endowment in alternative investments. Their 2001 endowment totaled $18.3 billion. By contrast, their 2001 rate-of-return was -2.7 percent-an $800 million loss.
The College, in comparison to other schools, seems to have escaped with relatively minor financial injury due to advantageous investing strategies such as hedge fund investment.
"Economic history suggests that, in times of poor stock-market returns, defensive investments fare well. Assets like bonds and hedge funds helped some colleges offset poor equity returns in 2000," reported The Chronicle.
"Hedge fund investing, while risky, should be less sensitive to business cycles than more traditional investments," said Professor of Economics Geoffrey Woglom.
According to Shea, the College cautiously distributed endowment investments. "The Trustees were careful to diversify the endowment portfolio over the last 10 years or so and have recently shifted some of that allocation to hedge and absolute return funds," Shea said. "This has allowed the College to avoid the dramatic downshift of the regular equity markets."
According to Shea, the College's investment strategy allows room for periods of economic downturn."The College carefully budgeted the amount distributed from the endowment so that a reduction in the market value of the endowment (or a period of flat investment returns) would not force the College to reduce spending from that source," said Shea. "That strategy will work as long as the markets do not continue to decline for a number of years in a row. Naturally, if that happened, we would have to carefully review spending and make necessary adjustments."
Since most colleges and universities construct their investment strategies to secure long-term results, one year of economic downturn may not greatly affect investment strategies. "Endowment managers like to say that one year of poor performance will not hurt an institution's overall fiscal health," reported The Chronicle. "The claim rests on the principle that an endowment's contribution to a college budget is typically calculated as a percentage of an endowment's average value of a three-year period." Such a calculation method is intended to smooth severe fluctuations that can result from disparities in investment performance or capital gifts.
With the likelihood of negative returns for this fiscal year and the risk of recession, colleges and universities may be forced to cut revenues, find ways of increasing revenues, or dip into savings. "[A recession would] probably lead to slower rates of tuition growth and increase the financial aid bill," said Woglom. "[However,] given the unusually good performance of the endowment during [fiscal year] 99-00, the College's 'spending formula' will automatically call for more spending, so this should not be a major problem," Woglom added.
The College regularly evaluates its financial resources and expenditure needs. "If the required fee increase exceeds an acceptable percentage increase, expenditures would be reviewed for possible reductions," said Shea. This is not the first time that the College may be asked to seriously consider finances due to economic instability. "The College has experienced other recessionary periods and will set the comprehensive fee for next year using the appropriate and available financial information," he said.