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Economy hurts Marquette’s endowment

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  • Endowments nationwide declined 23 percent from July to November of 2008.
  • Marquette’s endowment has dropped approximately 25 percent since last June.
  • Fiscal year 2009 has been the worst for endowments since national numbers were first tracked in 1974.

The current recession has driven many colleges to make budget and staff cuts, but it has also severely damaged one traditional safety net — the endowment fund.

Endowments cover a certain percentage of university operating budgets, as well as funding for scholarships and capital projects.

From July to November, endowment funds nationwide declined by an average of 23 percent, according to a study conducted by the Commonfund Institute and the National Association of College and University Business Officers.

Marquette’s endowment has not fared any better, declining about 25 percent since last June, according to the 2008 president’s report released in March. That puts the endowment’s total market value at approximately $268 million.

Thus far, fiscal year 2009 has been the worst for endowments since national numbers were first tracked in 1974, said Brett Hammond, chief investment strategist for TIAA-CREF. The not-for-profit financial service company has collected endowment data for NACUBO since 2000.

Endowments experienced a negative 11.4 percent average return on investments in 1974. That was the largest drop in the last 35 years until the first half of fiscal year 2009, when endowments had an average rate of return of approximately negative 23 percent.

The current recession is the worst since the 1930s, said John Griswold, executive director of the Commonfund Institute.

Endowment portfolios are generally complex and diversified to ensure safety of the principal amount, Griswold said. However, the financial collapse left nowhere to hide.

“It was the first year in decades where diversifying didn’t work well,” Griswold said. “Everything went down.”

As endowments soared in the 1990s, universities began devoting a larger portion of the funds to covering expenses.

Endowments constitute 12 to 13 percent of operating budgets at most universities, Griswold said. That reliance has spelled trouble in the current recession.

“(Universities) hadn’t anticipated this much of a downturn,” said Marquette Provost John Pauly. “We assumed a high level of return and that a large amount (of endowment funds) would be there. All of a sudden, that’s a new operating expense that has to be carried.”

Marquette has a smaller endowment fund than most colleges ($357 million versus Harvard University’s $36.6 billion, as of June 2008). However, Marquette is also much less dependent on it, Pauly said.

Marquette’s endowment makes up 5 percent of the annual operating budget, said Tim Olsen, communication manager in the Office of Marketing and Communication, in an e-mail.

The recession will reset expectations of endowments, something Hammond said might be “healthy.” Colleges are already reviewing their portfolios and may consider shrinking the percentage of their operating budgets that draws from endowments, he said.

Colleges struggle to quickly adjust their endowments during recessions, said Ken Redd, director of research and policy analysis at NACUBO. Endowments are “long-term investment vehicles” that don’t really allow for sudden investment changes, he said. For private institutions, about half of the funds are restricted to a specific purpose.

Marquette’s endowment decisions look long-term, emphasizing diversified assets, Olsen said.

The College of Business Administration’s Applied Investment Management program is one of approximately 12 different groups that manage Marquette’s endowment, said David Krause, an adjunct assistant professor and director of the program. AIM allows selected finance majors to oversee the investment of $1.5 million in endowment funds annually, less than 1 percent of Marquette’s total endowment.

AIM students have been on the defensive to combat the effects of the recession, investing in stocks that are neither “high growth” nor “high risk,” Krause said.

The endowment funds AIM invests showed negative returns in 2008 and the first quarter of 2009, but beat their benchmarks, Krause said. Essentially, every portfolio was down, but Marquette’s was better than most.

The 25 percent decline in Marquette’s total endowment has forced the university to think of “backup and contingency plans,” Pauly said. There will be less money in the fiscal year 2010 budget, and less endowment money to put toward it.

“We’re trying to find alternative ways to support expenses,” Pauly said. “We’re encouraging exercising caution with spending until the endowment picks up, and to recognize there are less funds available.”

Still, the university is “cautiously optimistic” about the future, Pauly said, citing a good credit rating, low debt and good cash reserves.

Donations, which contribute significantly to Marquette’s endowment, are down. However, Pauly expects those to increase as the economy improves.

“People love Marquette,” Pauly said. “They will give when they find they’re in a position to give. They’re trying to be prudent, too.”

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