Endowment falls record 20 percent
Aaron Steiner | Friday, October 2, 2009
Notre Dame’s endowment assets took a hit last year during a period of historic market turmoil, but outperformed a number of peer institutions and key indices, ending with a market value of $5.5 billion, University Vice President and Chief Investment Officer Scott Malpass said Thursday.
Malpass recently reported 2009 fiscal year results to University Trustees, detailing the endowment’s 20.8 percent decline over 2008 results, when the investment pool was valued at $7.1 billion.
Malpass said he’s “never happy to be down,” but was pleased to fare “relatively well” during a “very challenging year.”
“Our performance was at the better end of the big endowment group,” he said, adding that the fund also performed better than the S&P – which fell 26.2 percent last year – as well as key international and other indices.
The fund’s decline brought it back to late 2006 levels (the endowment was valued at $5.1 billion in 2006) while markets lost significantly more value, with the S&P going back to values similar to those in 1996.
The University’s endowment is the 13th largest among all U.S. higher education institutions, and the largest among Catholic universities. Harvard University’s endowment – the country’s largest now valued at $26 billion – dropped 27.3 percent in 2009.
Malpass noted not only did Notre Dame outperform some of the larger endowments; the University has also not decreased spending out of the endowment where other schools have attempted to cut spending.
“The wonderful thing, despite the implosion, is that we didn’t have to cut spending, it didn’t affect financial aid at all, and in fact we’ve increased financial aid,” Malpass said.
Yale University is currently aiming to cut spending by $150 million a year, and Princeton University will likewise cut spending by $170 million annually – both schools with some of the country’s largest endowments, which both saw declines around 24 percent in 2009. Cuts like these have translated into hiring freezes and capital project delays.
In contrast, Notre Dame increased spending out of the endowment in 2009 to $215 million. Malpass said Notre Dame’s annual operating budget remains just under $1 billion and hasn’t been affected “at all” by the endowment’s performance. In fact, the University will increase spending out of the endowment by five percent in the current year, he said.
Malpass said the endowment spending rate – the amount taken to help fund the operating budget each year – has jumped from a relatively low 3.6 to 4.5 percent in 2007, which is significantly less than rates of seven or eight percent at peer institutions. Universities with higher spending rates like those tend to cut spending to maintain the endowment pool, but Malpass doesn’t anticipate that to happen at Notre Dame.
He also pointed to the University’s modest debt load and capital construction funding policies as reasons why spending has been unaffected by the decline.
The University maintains an AAA debt rating and Malpass said Notre Dame has typically held lower debt than its peers, enabling the University to safely increase debt last year to fund spending.
“That gave us flexibility in the crisis. We issued some taxable notes for liquidity purposes … and we couldn’t have done that and kept our AAA rating if we were already loaded in debt,” he said.
The capital construction policy at Notre Dame requires that all funds be obtained before construction begins, which means construction projects on campus haven’t been halted as a result of the decline.
“That’s totally unheard of,” Malpass said of the policy. “Schools way overreach there, and that gets you in trouble.”
Within the investment pool, Malpass said Notre Dame has always been “well diversified, and well balanced.”
“We do a lot of the same types of investments Harvard and Yale and Princeton do,” Malpass said, but noted Notre Dame does “a little less in real estate.”
“That was key, because real estate got clobbered,” Malpass said. Real estate investments make up less than 10 percent of the University’s endowment assets, compared to “about 25 percent at Yale” and “near 20 percent” at Harvard.
Malpass also called the endowment’s hedge fund portfolio “the best in the country” and said while it declined, it added more value than comparable hedge funds.
Malpass praised the investment team at Notre Dame and some 150 managers spread across the globe for their performance, noting that in the last three years overall, the Notre Dame endowment has outperformed all of the top 20 endowments.
“To do as well as we have over the last several years – we were at the top of the group – and then to be relatively a little better in a down market, that says a lot about our portfolio,” Malpass said. “I’m encouraged by that.”
But Malpass remains cautious about the next year’s prospects.
“The economy’s still fundamentally very weak,” he said, adding concerns about high unemployment, the levels of toxic debt still held by many banks and longer term fears about inflation.
When Malpass came to Notre Dame in 1988, the endowment valued $425 million. It peaked last year at $7.1 billion. The endowment typically funds around 20 percent of the University’s operating budget.