This article is the second in a two-part series examining college endowments. The first section, printed in yesterday's paper, looked at the findings of a recent report showing huge endowment losses. Today's article focuses on endowment investment and management practices.
A National Association of College and University Business Officers (NACUBO) and Commonfund Study of Endowments (NCSE) report revealing that universities across the country had suffered major endowment losses in the 2009 fiscal year, has thrown a spotlight on the management of university endowments.
One question that has arisen is whether these losses, which averaged 18.7 percent, were the result of risky investments or simply a product of the ongoing economic recession.
In an interview with Bloomberg's Boston bureau, University President Lawrence Bacow claimed that the significant endowment losses at institutions like Harvard resulted from risky investment strategies.
Bacow also noted in the interview that wealthier endowments tended to engage in riskier investments.
According to NACUBO's Director of Research Policy and Analysis Ken Redd, however, this past year's widespread losses were less a product of risk and more the result of the worldwide economic crisis.
Still, Redd agreed that "some of [the institutions] are a lot riskier than others," but emphasized the limits on universities' possible investment strategies.
"There really is no safe place to go for investors," he said, citing treasury bonds and cash as the few arenas immune to economic troubles.
Redd pointed out that the outcome could have been more severe. "[University endowments] didn't do well but it could have been a lot worse had they not been invested the way they were," he said.
In regards to investment guidelines, the NCSE report revealed that just 178 of the 842 schools surveyed reported having an investment policy that uses so-called "socially responsible" investments. Just over half of those claimed to fully screen their portfolios.
Screening typically seeks to eliminate investments related to tobacco, gambling, pornography, abortion and armaments.
According to Redd, the remaining institutions are likely to have comparable investment guidelines, but lack a more exclusive responsibility plan.
"The other institutions certainly do, they just don't have investment policies that restrict them from investing in certain types of companies," he said.
Tufts investment officers declined to go into the specifics of the university's investment practices, citing the need for a degree of confidentiality.
Chairman of Tufts Administration and Finance Committee Andrew Safran (LA '76) defended Tufts' lack of endowment transparency, noting that it was largely a restriction imposed by third-party investment managers.
"We're as transparent as we can be, given the restrictions that we have on the confidentially that we're bound to with some of the managers that we invest with," Safran said.
He noted that third parties manage virtually all of the positions in the endowment.
Tufts Chief Investment Officer Sally Dungan said that the reason for the lack of transparency is to protect the integrity of the investments.
"Most of the university's investments, and in particular those with the highest-quality managers, are accessed through funds governed by confidentiality agreements," Dungan said in an e-mail to the Daily. "The level of transparency is intended to provide as much information as possible to the community without jeopardizing the quality of the investments the university is able to make."
All endowment investments are made with the goal of supporting future generations of Tufts students and faculty, according to Dungan.
Though it is too soon to draw firm conclusions, the 2010 fiscal year may show improvements in endowment returns, according to Safran.
"Clearly, the financial markets have experienced extraordinary volatility, and Tufts has not been immune to that volatility," he said. "Halfway into the 2010 fiscal year, the endowment already recovered a significant portion of its losses from the previous year."
Safran attributed these inroads to the prudent stewardship of the investment committee.
Dungan pointed out that Tufts' Beyond Boundaries campaign is "well on its way" to reaching its goal of raising $1.2 billion for the university and that despite its recent losses, the university did better than anticipated.
Redd explained that while considering the subject of endowments, it is important to maintain a long-term view.
"For many students and faculty, a decline in the endowment is something that is worrisome," he said. "I think that you have to keep in mind that endowments are unique investments and they're designed to last in perpetuity — a decline this year is not something to panic about because they are long-term. The most important thing is to keep the endowment sustainable over the long term to support generations of students and faculty."
