Harvard, Dartmouth Losses May Widen on Private Equity (Update3)

By Gillian Wee

Jan. 27 (Bloomberg) -- North American college endowments lost an average of 22.5 percent on investments from July to November and the declines probably will get bigger after returns on private equity and real estate are calculated.

The funds shed $94.5 billion in asset value in the five months ended Nov. 30, according to a study released today by Commonfund and the National Association of College and University Business Officers. The loss, the biggest in 35 years, compares with a 29 percent decline in the same period by the Standard & Poor’s 500 Index, including reinvested dividends.

Harvard University, whose $28.8 billion endowment is the biggest in higher education, and Ivy League rival Dartmouth College have 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. These assets probably dragged down returns further, meaning less income for schools that are already cutting budgets.

“It’s as bad as it gets,” John Griswold, executive director of the Commonfund Institute, said in an interview. The Wilton, Connecticut-based center is affiliated with Commonfund, a manager of more than $25 billion, and seeks to improve investment returns by nonprofit organizations.

Endowment income is a primary source of revenue for colleges and universities, along with tuition, public financing and gifts. Schools use investment earnings to help pay for salaries, scholarships and capital improvements like new buildings.

The Commonfund-Nacubo study findings were based on market value estimates by investment professionals at 435 schools with a combined $420 billion at the start of the fiscal year in July.

Endowment Scrutiny

In fiscal year 2008, funds lost an average of 3 percent, their third decline in eight years, according to the separate study conducted by Nacubo, and TIAA-CREF, which surveyed 796 colleges and universities in the U.S. and Canada.

The losses so far this year surpass those in 1974, the worst year for endowments, according to Commonfund and Brett Hammond, chief investment strategist for New York-based TIAA-CREF Asset Management, which worked on a separate survey with the Washington-based business officers association. Losses may climb to as much as 40 percent by June if the public and private markets don’t recover, Griswold said.

Endowments have drawn criticism from Senator Charles Grassley, the Iowa Republican who has raised issues of tax fairness in relation to Harvard’s fund and those of other large schools. Grassley said yesterday schools shouldn’t use their portfolio losses “as an excuse” to increase tuition or halt student aid and instead should spend more.

‘It’s Pouring’

“If an endowment is a rainy day fund, it’s pouring,” he said in a statement.

Harvard is freezing salaries at the Kennedy School of Government and the Faculty of Arts and Sciences to offset endowment losses, while the Stanford Graduate School of Business fired 49 staff members, about 12 percent of its non-faculty workforce. Brandeis University, in Waltham, Massachusetts, plans to close its Rose Art Museum and sell its more than 6,000 artworks to offset endowment losses, Dennis Nealon, a university spokesman, said today. Those works were appraised at about $350 million in 2007 by the school.

“You can cut expenses, borrow money and increase liquidity in your endowment fund,” said Verne Sedlacek, chief executive officer of Commonfund. “There’s not a lot of other options.”

More Alternative Assets

The percentage of endowment assets in alternative investments rose in the fiscal year ended in June as stock prices fell and colleges and universities shifted cash to support operations, Commonfund said. Endowments had an average of 46 percent of assets in alternative categories as of June 30, the study shows.

At endowments managing more than $1 billion, the allocation increased to 52 percent from 47 percent, according to the study. Those with between $500 million and $1 billion in assets had the biggest increase, moving to 42 percent from 35 percent.

Harvard, in Cambridge, Massachusetts, said its endowment fell 22 percent from July to October and is planning for a 30 percent decline, since its estimate didn’t fully reflect the value of its private equity and real estate.

The university put $1.5 billion of buyout stakes on the market last year. Most of the holdings went unsold because the offers were too low, three people familiar with the matter said last week.

Dartmouth, in Hanover, New Hampshire, lost 18 percent in the second half of 2008. Diana Pearson, a spokeswoman for Dartmouth, the smallest school in the Ivy League, said the college is studying how to value those assets.

Liquidity Paramount

The University of Virginia, which had $3.8 billion in assets as of Nov. 30, lost 25 percent in the first five months of the fiscal year, according to the Web site of its investment management firm.

The Charlottesville school’s private-equity holdings lost 38 percent, resources fell 32 percent and private real estate dropped 27 percent. The school valued those investments at “fair market value,” the site said.

“Liquidity is the biggest priority for endowments,” said Scott Malpass, chief investment officer at the University of Notre Dame, in South Bend, Indiana. “Things are changing so fast in the economy and in the market that one needs to remain vigilant and nimble and be opportunistic in making commitments.”

In the next two years, Notre Dame will focus on buying securities that protect its endowment from inflation and “enhancing our liquidity position to take advantage of select distressed opportunities in all asset classes,” Malpass said.

Malpass declined to say how much the endowment, which had $7 billion on June 30, had lost since then.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net .

Last Updated: January 27, 2009 15:44 EST

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