It was clear the good times were over. After the dot-com crash, University of Washington treasurer V'Ella Warren saw that record growth in the college's endowment was finished without a professional at the helm. "I believed that going forward, markets would be tougher," she says. "To increase returns we would have to be smarter."
So Warren did what a growing number of college treasurers are doing: she hired a blue-chip-fund manager from the private sector--in this case, Keith Ferguson from Fidelity Investments. Since Ferguson's arrival in January 2005, the UW's fund has delivered an annual return of 14.7 percent and grown to $1.7 billion. It now ranks as the 32nd largest endowment in the United States, and proves how far the endowment-growth boom has spread beyond the famous successes of Stanford, Yale and Harvard.
American colleges and universities are now among the world's most admired investors. The average return on endowments rose 9.3 percent last year, down from 15.1 percent in 2004 but still better than most rivals--and enough to draw imitators. Foreign universities are now following the lead of U.S. peers, flocking to a weeklong investment seminar held each year by the Commonfund Institute, which manages the endowments of nonprofits worldwide. Cambridge Associates LLC, a Commonfund counterpart, opened an office in Singapore five years ago in response to growing Asian interest. "If you look among professional fund managers and ask who are the best investors, they'd tell you U.S. colleges and universities," says Cambridge Associates manager James Bailey. "In general, they have performed a couple of hundred basis points better than any U.S. pension fund over the last 30 years."
Nothing lures new money like high returns. Last year, American colleges and universities received $26.7 billion in donations, up 4.9 percent from the previous year. A 2005 survey by the National Association of Colleges and University Business Officers found that academic endowments in the United States are worth some $300 billion--roughly the size of the Polish economy. Growth is more broad-based than ever, with an overwhelming number of institutions boasting endowments worth more than $1 billion. Such sizzling growth is prompting many academics and alumni to wonder if endowments are bulking up too fast, particularly in risky assets such as commodities and hedge funds. "The academic community is in an arms race for larger endowments and more resources," says Tim Cook, president of Kailas Capital, a Stamford, Connecticut-based hedge fund that counts several universities as clients. "You have some large colleges returning 20 percent a year, and they still feel the need to raise tuition."
It wasn't always so. Until recent decades, the typical college treasury was a sleepy place run by a retired college grandee who based his investment decisions on tips from his stockbroker or golfing buddy. Then, in 1973, pioneer investor George Putnam was hired to modernize Harvard's endowment and quickly brought in crack advisers, who moved into hedge funds, foreign currencies and the array of investments that has since made Harvard the endowment-race leader, with a war chest of $25.4 billion.
So with such impressive returns, why do tuition rates keep going up, often beyond the rate of inflation? Universities say they are paying bills today for last year's programs and facilities, in an endless game of catch-up. As endowments grow, though, so does frustration among alumni over endless requests for fresh donations and new study programs, sports facilities and lecture halls. "We are entering a point where our top institutions are at risk of being populated either with the superwealthy or the extremely talented," says Cook. "In other words, those who can afford to pay and those who can get in on a full scholarship."
On the other hand, schools like Berea College in Kentucky and Massachusetts's Franklin W. Olin College of Engineering are using flush donor funds to reduce tuition fees--a fine idea, investors say, absent the kind of stock-market dive that even college donor funds cannot ride out completely. Worries about such a calamity are growing, say academics, as many universities use endowment returns to finance a growing share of their budgets.
The risk is particularly high for state schools plagued by shrinking public funds. Writing in The Chronicle of Higher Education, Mark Schneider, a professor and member of the strategic-planning committee at Iowa's Grinnell College, recently spelled out what might happen to newly free schools if the market fell and the number of incoming students rose: "The board demands a sudden return to tuition, with faculty and staff cutbacks that lead to bad press off the campus and a drop in morale on the campus--certainly a scenario to give trustees and administrators pause." Perhaps. But for now the race is on, and most schools are winning.
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