College investments sink

Union College's Nott MemorialUnion College's Nott Memorial

By Zachary Matson

College endowments had a rough go in the fiscal year that ended in June, with nearly every college in the nation shedding endowment wealth — but Union College took a bigger hit than most.

The Schenectady-based private college lost over 10 percent of its endowment wealth between July 1, 2015, and June 30, 2016, according to its financial statement. After shedding over $50 million, the school’s endowment stood at just under $390 million on June 30 — down from $441 million a year earlier.

In that same fiscal year, Skidmore College lost nearly 6 percent of its endowment and Siena College lost 7.3 percent of its overall investments.

The 18 private liberal arts schools known as the “Little Ivies,” including Union, lost an average of 3.3 percent on their endowments last year, according to a Bloomberg News analysis. By comparison, the eight Ivy League schools lost 0.8 percent on average during the same period. But Union’s losses far outstripped its counterparts among the Little Ivies, tripling the category’s average.

John E. Kelly III, chairman of Union’s Board of Trustees, said in a written statement that Union “is in a very strong academic and financial position” but acknowledged the weak investment year.

“While endowment investment returns for the most recent fiscal year 2016 were disappointing, over the last several years and decade, we have achieved investment returns at, or above, the median,” Kelly said in the statement. “We are confident in our endowment management process and team.”

Endowments are meant to last for the long run, helping to support colleges’ operational budgets with investment income. And, indeed, Union’s endowment has performed well in the longer term. Between 2011 and 2016, including the recent decline, Union grew its endowment by nearly 19 percent. By comparison, Skidmore College, which has a slightly smaller endowment, grew its endowment by 9.4 percent — taking it to nearly $330 million as of June 30.

The down year for endowments comes as institutional investors begin to reconsider a big shift over the past 30 years toward more complex endowment portfolios.

College endowments are heavily invested in “alternative strategies,” which include hedge funds, private equity, debt-related funds and other complex strategies — even timber funds. That strategy was pioneered by Yale, which saw extraordinary endowment growth beginning in the mid-1980s, and it has been widely replicated ever since — the strategy is known as the “endowment model.”

“When you get a university or endowment that knocks the cover off the ball, everyone copies it,” said Hugh Johnson, chairman of Hugh Johnson Advisors in Albany, who works with large institutional investors and has over 40 years of investment experience.

Over half of college endowment investments are in “alternative” strategies. But the value of those alternative strategies may be subsiding as hedge funds proliferate and managers see weakening and inconsistent returns.

And the larger, more connected schools — like Yale, Harvard and other multibillion-dollar endowments — have better access to the most-respected hedge fund and private equity firms by dint of size and relationships. So those schools are more likely to get a piece of the action on better deals.

“Size equals resources, size equals access,” Johnson said.

Endowments started to see their growth rates slide last year, when the average endowment grew by just 2.4 percent, according to the National Association of College and University Business Officers. That compared with a blistering 15.5 percent growth on average in the 2014 fiscal year.

Johnson said the increase in the number of hedge funds and private equity firms has made it more difficult for endowments and other institutional investors to get in on quality transactions. The field has been flooded. And the smaller the endowment, the more of a natural disadvantage it is at pursuing the “alternative” investments.

“The bloom is off the rose and everyone is figuring out that it is not easy to find good transactions,” Johnson said.
Many schools would have been better off investing in stock market indexes over the past decade — a far more passive strategy than what is utilized for the involved and complex portfolios of most endowments, and usually carrying much lower investment management fees.

Between 2005 and 2015, private colleges and universities on average saw an annual endowment investment return of 6.3 percent a year, according to data collected by NACUBO. In that same time frame, the average annual return for the S&P 500 index was 7.9 percent.

Union’s endowment relies on a diverse portfolio of stocks, bonds and “alternative” investments. Roughly 35 percent of the college’s investments are in stocks and mutual funds. Nearly half of the college’s investments are in hedge funds, private equity and venture capital, emerging markets and debt-related assets. (In 2016, Union paid nearly $5.6 million in investment management fees, down from nearly $7.9 million the year before.)

While nearly all of Union’s investments saw some decline from July 2015 to June 2016 — the Dow Jones Index was essentially flat in that period and the S&P 500 rose 1.5 percent — it took the biggest hit in the alternative investments. The school’s investment in “debt-related” funds dropped by over a half, or roughly $13.5 million. Its “hedged equity” investment fell by nearly 13 percent, or over $12.3 million. The private equity and venture capital investments dropped by nearly 25 percent.