Endowment returns fall short of spending

The University’s endowment returns fell sharply last fiscal year, growing the pool of money by only 2.4 percent after international economic crises stung investments and forced GW to spend more than it earned.

The slim growth in returns, far less than the average 19.5 percent return on the endowment in the past two years, explains the $25-million dip in GW’s $1.3 billion endowment last fiscal year, which ended in June.

About 5 percent of the endowment, the lifeblood of the University’s finances, is used each year to fund academics, financial aid and construction projects. GW used about $69.2 million last year from the endowment, while the endowment only grew by about $44.2 million.

The last time GW dipped into its endowment was during the financial crisis in fiscal year 2009, when returns lost about 21 percent.

The hit likely comes from the University investing nearly half its endowment assets in global equity. The University disclosed that fact in last year’s endowment report, and Executive Vice President and Treasurer Lou Katz said that investment allocation changed little from the previous year.

Though the University is in the midst of massive capital projects, including its most expensive academic building and residence hall to date, Katz said the University is not flinching at the drop in its annual return rate.

Since the financial crisis crippled university funds nationwide, GW has performed better than universities with stronger endowments, adding dozens of faculty and continuing construction projects as others froze hiring and delayed building projects.

The treasurer stressed that GW focuses on the five-year rate, which has made the University about 7 percent richer even amid a global recession that spurred negative returns for two years.

“It’s not that important to me on an annual basis,” he said. “What I focus on is what the returns have been over longer periods of time – if I believe we’re invested in the right asset classes, because that really drives your return, and how you compare to the overall marketplace.”

But, Katz added, the difficult capital markets mean the days of 20 percent returns are likely over – making GW’s fundraising efforts and cost-cutting strategies more important.

The crawling investment returns fall in line with the financial standstill felt across higher education.

A preliminary study by Commonfund Institute and the National Association of College and University Business Officers found in late October that universities with endowments larger than $1 billion earned 1.2 percent from investments last year – half the percentage GW took home.

Even Ivy League schools weren’t immune from stagnant returns. Harvard University endured an investment loss of .05 percent and Yale University earned 4.7 percent on its endowment.

Some of GW’s competitor schools also saw little growth. Vanderbilt University posted a 1.3 percent return last year on its $3.4 billion endowment and Northwestern University gained about 5.3 percent on its about $7 billion endowment.

Those universities all have followed a pattern similar to GW’s. During 2008 and 2009, the schools lost between 15 percent to 30 percent on investments, reversing that with double-digit growth the next two years before leveling off now.

Ken Redd, director of research and policy analysis at the National Association of College and University Business Officers, said tanking global markets hurt endowments like GW’s nationwide.

“The number one thing that hurts institutions is that their investments in international securities have been really hurt by the European situation and the slowdown in the emerging markets in China,” he said.

Investing in global equity, hedge funds and private equity has its risks, Redd said, but the investments typically pay off over time.

Katz announced the endowment size in September, but the University reported investment returns last week. GW will release a full endowment report, which will include complete investment allocation from the last fiscal year and look at each of GW’s schools as well, in two weeks.

“Everyone was high last year and low this year. It’s the market,” said Sandy Baum, a senior fellow in the Graduate School of Education and Human Development who specializes in higher education finance. “It makes more sense to be more conservative for your estimates for the future, but it means not to panic when you get 2 percent returns for one year.”

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