University endowments experienced unusually high investment returns in 2004, averaging 15.1 percent, according to a report released in January. The report, compiled by the National Association of College and University Business Officers, surveyed 741 American institutions whose endowments had a combined value of $267.2 billion - the largest value in the 33-year history of the study.
Institutions with smaller endowments typically use the NACUBO report first as a benchmark of success and then as a guide for selecting investment managers, according to NACUBO Public Affairs Manager Damon Manetta. Last year's increase was the greatest since 1998, but given losses in recent years, the five-year average return of 3.8 percent still represents an overall decline in endowment value when adjusted for inflation. "This one-year spike is an unusual circumstance," Manetta said.
Of the schools included in the study, those that invested more heavily in stocks and equities performed better than those with more significant bond holdings. However, this analysis is slightly simplistic for institutions such as Brown, whose endowments are over $1 billion and generally managed by investment offices rather than a university board committee.
"NACUBO data is useful to some extent, but each school is unique and its investments are tailored to its own requirements," wrote Vice President and Chief Investment Officer Cynthia Frost in an e-mail.
Frost and Executive Vice President for Finance and Administration Elizabeth Huidekoper both said they were pleased with Brown's 16.1 percent return on investment for fiscal year 2004, which outperformed the NACUBO median.
While the report noted that results did reflect a general economic upturn, individual investment strategies are important. Larger endowments have successfully invested less in traditional areas and "more towards types of alternative investment, like hedge funds, private equity and international equity," Manetta said.
"We did better than if you just had all the money in an index fund," Huidekoper said. "It's not just economic upturn, but also because of asset allocation and good managers."
Brown's Investment Office, headed by Frost, manages the $1.65 billion endowment by determining long-term goals and asset allocation, but leaves individual investment decisions to external managers selected through a "stringent due diligence process" and according to specific criteria - including social responsibility, Frost said. She said there have been no major changes in investments since divestment from tobacco stocks in September 2003.
Alternatively, Harvard University, which has an endowment of $22.1 billion that ranks first in terms of total value, and the University of Texas, ranked third at $10.3 billion, both have internal management companies. However, compensation for these companies' managers has created controversy, most recently at Harvard Management Company, where the six highest-paid managers received a combined $100 million in compensation in 2003. The HMC made headlines in January when President and Chief Executive Officer Jack R. Meyer announced he would leave to start a private fund.
With the smallest endowment in the Ivy League for decades - ranked 25th overall - Brown's Investment Office faces different challenges.
"Since we have a smaller endowment, we aren't as aggressive as some other (institutions)," Huidekoper said. "Brown's strategy is to invest a little more defensively than some other institutions, and that's the Investment Committee of the Corporation that makes that call."
Frost described the portfolio as "designed for all seasons" through wide diversification that supports endowment-spending power in the long run. Last weekend the Corporation approved the contribution of $66.7 million of the endowment to the University's 2005-2006 operating budget - an endowment draw of approximately 5.27 percent. Last year's strong returns had little impact on that decision, because endowment growth is "more relevant to the long-term financial plan" than the yearly budget, Huidekoper said.
According to Huidekoper, the per-student endowment of $219,000 - up from $195,000 last year - better indicates Brown's ability to support students with its endowment, compared to peer institutions, because of the University's smaller student population. Still, the University has been behind by a wide margin for decades.
"It is highly unlikely that we can catch up with any of our peers through superior investment returns alone," Frost said. "To close the gap Brown needs exceptional fundraising."
Although Huidekoper said substantially increasing the endowment is a goal in the long run, she and Frost are pleased with what the 2004 results mean for Brown.
"Most importantly, the University is on firmer financial footing than one year prior," Frost said.
