Investors across the country are feeling the effects of the downturn in the stock market, and universities are no exception.
Universities commonly invest in stocks to generate income for their endowment fund, which pools the money given to the university as donations and gifts. At Ohio State and other colleges and universities in Ohio, that money funds university scholarships, new facilities and the overall operating budgets.
According to the Office of the Treasurer Web site, the market value of the OSU endowment fund for 2002 was about $960 million, down from $1.1 billion in 2001.
Though the outlook of the stock market is bleak, universities are still putting endowment money into the exchange. James Nichols, university treasurer at OSU, said the financial planning of endowments is long-term, and investors of endowments must weather the good with the bad.
“If you don’t want to lose money, you need to bury it in a tin can in the backyard,” Nichols said. “We want to increase value over a long term.”
Nichols said when major indexes of the stock market go down, university investment will falter, but the primary function of endowment investing is to create a consistent flow of income for the university.
The university spends 5 percent of income from the endowment annually, Nichols said.
According to the Office of the Treasurer Web site, OSU has a well-diversified investment plan, including corporate and government bonds, real estate and cash, in addition to common and preferred stocks.
G. Andrew Karolyi, professor of finance at the Fisher College of Business, is the faculty administrator for the Student Investment Management Program, a group that manages $15 million of the OSU endowment.
“Absolutely the contraction of equity markets has taken many victims,” Karolyi said. “The hope is we don’t fall as far as other benchmarks, or other markets.”
Karolyi said the student investments remain responsible, focusing on stocks with names people are familiar with.
The investment practices must be balanced, focusing on growth and value-oriented investments, he said. Growth investments are stocks that have recently experienced growth in earnings, and value investments are stocks that have taken a beating but are likely to turn around soon.
Being sensitive to choices and diversifying stocks by size and growth, instead of by value, are ways to maintain a well-balanced portfolio in tough market times, Karolyi said.
“With many equity-oriented endowments, as the market swoons so does the endowment,” Karolyi said. “There will be bumps — sometimes big bumps — in the road, but you have to look down the road and be responsible.”
Private schools manage their endowments similarly to public schools.
“The asset allocation forces you to adhere to two basic principles: Don’t put all your eggs in one basket, and buy low and sell high,” said Michael Horst, director of finance at Denison University.
Denison’s endowment, which was $400 million as of June 30, is used to support the university in the form of faculty salaries, student scholarships and other university-wide functions. A major hit to the stocks of the endowment could affect those services.
“So we want to be sure not to overspend now. We’ve been growing our operating budget for the last several years as we have made impressive investments in faculty, student quality, technology and facilities,” Dale Knobel, president of Denison, said in a statement. “We need to slow that growth now so that we can sustain our investments in educational quality for the long run.”
While only 12 percent of the Denison endowment is composed of stock, Horst said the market could still make an impression on the overall endowment.
“I believe the effects of a ‘major hit’ would be much less to a well-diversified portfolio like Denison’s than to the average individual investor or retirement account; however, to think we could escape unscathed would be naïve,” Horst said.
The endowment for Otterbein University is significantly smaller at $58 million, but 60 percent of it is in equity, or stocks.
Richard Dorman, vice president of advancement at Otterbein, said a “fairly conservative” portfolio and conservative spending have kept the university in good financial condition.
“We didn’t have technology or telecommunications investment,” Dorman said. “We don’t speculate in the endowment. Our primary concern is to preserve the capital.”
Dorman said Otterbein is more tuition-dependent than endowment-dependent, so when the market takes a turn for the worse, the operating budget is not a victim. This saves cuts in spending and it saves jobs.
