Endowment Wealth: The Huge Disadvantage of the Black College

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Good morning,

I am reading an article in the Summer, 2004 issue of The Journal of Blacks in Higher Education, entitled, "Endowment Wealth: The Huge Disadvantage of the Black Colleges." It is an interesting article. The article states that "Harvard University earns about $7.5 million on its endowment every day..." The article cites about 30 black colleges that have a total of "less than $1 million dollars in endowment wealth". Edward Waters College was listed. Morris Brown was listed as one of the black colleges that has an endowment of "less than $5 million." For those economists out there, such as Bill Dickens, how, exactly, does a black college build endowment wealth? No where does this article explain or describe that process. Also, I have noticed that several mainstream (white) denominations also have large endowments, such as Harvards? How does an institution (church or college) build an endowment? Maybe the United Negro College Fund needs this information. God bless. A.J.

-- Anonymous, January 27, 2005


A major source of Endowment Funds is the Alumni of the institution. We established an Endowment Fund for Paul Quinn College in Dallas. Texas Instruments, The Dallas Morning News and many other local businesses made major contributions. The community was asked to match funds contributed by various businesses. When prominent persons are seated on the Board of Directors, their companies tend to make contributions also. The CEO of the Dallas Morning News spearheaded the Endowment Fund Drive for Paul Quinn. The Goal was $30 Million. The last number I heard was $27 Million.

Be Blessed al paris

-- Anonymous, January 27, 2005

Any successful college endowment program MUST have a comprehensive investment strategy. The strategy should include all investment options where returns can be maximized for a given level of institutional risk. In plain English that means a college should utilize alumni and other private financial donations and repackage those funds into several bundled investment products. Black colleges tend to have low endowments because our alumni tend to be niggardly in supporting these colleges, our Board of Trustees are overly populated with non-Wall Street & low net-worth members, we lack a savvy marketing model to identify potential donors and our campus administrators adopt myopic and risk-averse strategies in the securities markets. In short, most HBCUs remain equity poor, due to stingy alumni and administrators terrified at seeking high yielding assets. This profile ensures your college endowment will remain in the doldrums. See the November 2004 A.P. article below to see how the succesful and prestigious schools build their endowment. QED

Harvard, Texas, Texas A&M, Michigan '04 Gains Exceed 20 Percent Nov. 24 (Bloomberg) -- Harvard University, Texas A&M University and the universities of Michigan and Texas turned investments from timber, energy and non-U.S. equities into endowment gains of more than 20 percent in 2004, handily beating the return of the benchmark Standard & Poor's 500 Index.

The four endowments were the top performers in U.S. higher education in the 12 months ended June 30, according to a survey compiled by Bloomberg of 25 colleges with more than $1 billion invested. The S&P 500 rose 17.1 percent in the same period.

The annual results for U.S. college endowments may be the best since the funds rose 17.5 percent on average in fiscal 1998, according to the National Association of College and University Business Officers in Washington. Endowments climbed 3 percent on average in fiscal 2003 after declining in the two previous years.

``It all came together,'' said Jon King, chief investment officer for Dartmouth College in Hanover, New Hampshire. The school's 18.6 percent return in fiscal 2004 was buoyed by investments in stocks, hedge funds and buyout funds, and a lower allocation to bonds, he said.

Harvard, located in Cambridge, Massachusetts, gained 21.1 percent in fiscal 2004, buoyed by investments in hedge funds, commodities and non-U.S. bonds. That performance led all schools providing data for the Bloomberg survey. Harvard's $22.6 billion endowment fund is the largest among U.S. universities, followed by Yale University's $12.7 billion.

Energy, Private Equity

The University of Michigan in Ann Arbor, with a $4.2 billion endowment, recorded a 20.7 percent increase, led by a 30.9 percent gain in stock investments, according to a report to the school's regents. Stocks accounted for two-fifths of its portfolio. Investments other than publicly traded securities rose 34 percent, including an 82 percent gain in energy investments and a 30.3 percent increase from stakes in closely held companies.

The University of Texas Investment Management Co., which oversees funds for the University of Texas at Austin and Texas A&M in College Station, allocated more than 52 percent of assets to U.S. and international equities. The University of Texas endowment rose 20.1 percent and Texas A&M's gained 21 percent.

The year's gains by U.S. colleges will allow them to ``get over the hangover'' from the bear market of 2001 and 2002, said John Griswold, 60, executive director of the research and education institute at Commonfund, a Wilton, Connecticut-based manager of $30 billion for nonprofit institutions. ``A lot of these folks still have tight budgets.''

Stanford University in Stanford, California, said in September that it was lifting a two-year hiring freeze. The endowment, which had an 18 percent return in fiscal 2004, contributed about $400 million in income to the school, accounting for 16 percent of its $2.5 billion budget.

International Stocks

Equity gains were the key to improved returns at most schools surveyed. Stocks outside the U.S., as measured by the Morgan Stanley Capital International Europe and Far East Index, increased 29 percent in the year ended June 30, the index's strongest fiscal-year performance since 1987.

Houston's Rice University had a 35 percent return from its international equity investments, said Scott Wise, 55, vice president for finance. Non-U.S. growth and value portfolios overseen by the Texas A&M University System rose 35 percent and 36 percent, respectively, said Maria Robinson, 39, director of financial planning.

Fixed-income investments made negligible contributions to most endowments, as the Merrill Lynch U.S. Broad Market Index rose 0.3 percent after increasing 10.6 percent in fiscal 2003.

Harvard's Bonds

Harvard was an exception. Its U.S. bond portfolio rose 9.2 percent and non-U.S. bonds gained 17.4 percent.

``You can pretty much go down the list and see where the value added is, and you will find most of it in fixed income,'' said Jack Meyer, 59, chief executive of Boston-based Harvard Management Co. Harvard's managers, who divide investments among 11 categories, said the funds outperformed index-based benchmarks in nine of them.

Harvard reported Nov. 22 that its top six endowment managers earned a combined $78.4 million in the fiscal year, mostly from bonuses. David Mittelman, a U.S.-bond manager, was paid $25.4 million, and Maurice Samuels, who oversees non-U.S. bonds, received $25.3 million.

Commodities, including about $2 billion in timber assets, rose 19.7 percent at Harvard. The university owns assets in North America and overseas, notably a New Zealand pine forest it bought a year ago. Harvard's hedge funds pulled in 15.7 percent.

Hedge Funds

Harvard manages most of its assets with an in-house investment team, while other universities generally hire outside firms. Commonfund's Griswold said the university's in-house team, plus Harvard's ability to take risks because of its scale, contribute to its performance. Harvard is willing to be a contrarian investor and place funds in newer investment areas more readily than others, Griswold said.

Among the worst performers in the top-25 college funds was the $2 billion University of Virginia endowment, which increased 12.7 percent. Hedge funds made up about 55 percent of the portfolio and gained 10.8 percent. The university is in Charlottesville.

In fiscal 2003, the 25 largest college endowments accounted for more than half of the $230.5 billion in assets at 723 institutions surveyed by the National Association of College and University Business Officers. Results of the association's 2004 survey are scheduled for release in January.

Historically, endowments with more than $1 billion in assets have had higher annual returns because of better access to high- quality managers and an ``earlier entree'' into promising investments, said Damon Manetta, spokesman for the association.

The Outlook

Endowments won't likely repeat their 2004 gains in the current fiscal year. The S&P 500 has risen 3.2 percent since June 30 and the Morgan Stanley Capital International Europe and Far East Index is up 7.9 percent.

A report by Santa Monica, California-based Wilshire Associates found that U.S. foundations and endowments with more than $1 billion in assets gained 0.7 percent in the three months ended Sept. 30.

In addition, institutional money may flood hedge funds, diluting the advantage for colleges that were early investors. U.S. institutional investors will increase their investments in hedge funds to $300 billion from $66 billion in the next five years, according to a September report from Bank of New York Co. and Casey, Quirk & Associates LLC, an investment-management consulting firm in Darien, Connecticut.

`Diminished' Opportunity

The University of Texas, which has $2.8 billion in hedge funds, last week said it plans to add an additional $300 million to those investments in the next six months.

``The opportunity set is sharply diminished,'' Harvard Management's Meyer said. ``We continue to try hard to find assets that are mispriced, but it's difficult, and so I'm just trying to send the signal and trying to keep expectations in line.''

Meyer, who called hedge funds ``our bread and butter'' during the 1990s, said he expects annual gains of about 8 percent in the next decade rather than the 12 percent Harvard has averaged since 1995.

Fiscal 2004 Performance of U.S. College Endowment Funds

Institution Endowment size Return June 30, 2004 2003-2004

Harvard University $22.6 billion 21.1% Yale University $12.7 billion 19.4% Stanford University $10.0 billion 18.0% Princeton University $9.9 billion 16.5% University of Texas $9.7 billion 20.1% Massachusetts Institute of Technology $6.0 billion 18.1% University of California $4.8 billion 14.7% Emory University $4.5 billion 14.6% Columbia University $4.5 billion 16.9% Texas A&M University $4.3 billion 21.0% University of Michigan $4.2 billion 20.7% Washington University St. Louis $4.1 billion 18.2% University of Pennsylvania $4.0 billion 16.9% Northwestern University $3.7 billion 19.2% Duke University $3.3 billion 18.0% Rice University $3.3 billion 17.2% University of Chicago $3.6 billion 16.6% Cornell University $3.3 billion 16.1% University of Notre Dame $3.1 billion NA Dartmouth College $2.5 billion 18.6% Vanderbilt University $2.3 billion NA University of Virginia $2.0 billion 12.7% Johns Hopkins University $1.9 billion 15.3% Brown University $1.7 billion 16.3% University of Southern California NA NA

Source: 2004 Bloomberg survey of the top 25 schools in 2003 ranking by National Association of College and University Business Officers. (NA=school declined to provide data. Southern California's fund total ranked 21st in 2003.)

-- Anonymous, January 28, 2005

You are absolutely right Bill. Amen. Will we ever learn?

Be Blessed pastor paris

-- Anonymous, February 01, 2005

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