Though average investment returns for university endowments decreased this year, the Boston University endowment is not in danger, according to BU investment officials.
BU President Robert Brown said in an Oct. 5 ‘State of the University’ letter that while this year’s endowment performance was generally poor, the endowment had done well in comparison to market conditions as a whole.
‘Although poor on an absolute basis, the performance of our endowment has been good relative to the overall poor market conditions, as measured by all of the much-used indices,’ Brown said.
Brown said the investment return on the endowment for the year ending June 30, 2009 was down -21.7 percent. This is measured in the context of the S&P 500 – the index of large-cap common stocks in the United States – that was down by -26.2 during the same period, he said.
Brown said because a ‘long-term trailing average’ is used to determine endowment spending, income from the endowment actually increased by 4.8 percent from fiscal year 2009. BU’s endowment only composes less than three percent of BU’s operating budget, investment officials told The Daily Free Press in January.
‘The impact of the endowment decline will have a more adverse impact over the next several years as the decline weighs more heavily in the calculation of the distribution,’ he said.
BU Chief Investment Officer Pamela Peedin said officials take the average market performance of the previous four or five years and determine spending based on it. If the market does poorly as the year progresses, the average goes down and spending decreases.
Since the poor performance occurred beginning only last year, the overall average is still up, which Peedin said is beneficial for BU students.
‘The amount of funding distributed to the operating budget for the 2010 fiscal year increased because the average rose,’ Peedin said.
She said they use the average instead of the most recent figure to account for financial fluctuations.
‘By taking a longer term average, we smooth out the ups and downs of the market,’ she said. ‘We’ve taken some of the volatility out.’
Peedin said the endowment investment portfolio consists of highly diversified strategies, including various types of equities and fixed income investments.
‘An equity-dominant strategy has really done well for us,’ she said.
Unlike many other university endowments, BU’s endowment is relatively small and has less of an impact on the operating budget, Peedin said. Harvard’s endowment budget, for example, is much larger in comparison to its overall operating budget, making up about 30 to 40 percent, she said.
Brown said BU’s relatively smaller reliance on endowment means the changes will not have a huge effect.
‘Because endowment income is such a small fraction of our annual budget, this impact is not a major driver of our financial planning,’ he said.
Although the changes have not negatively affected the operating budget, the endowment is still extremely important, Peedin said.
‘We can grow it and make it evermore relevant,’ she said. ‘It’s a permanent pool of capital.’
Peedin said the endowment will not affect students’ lives at BU.
‘We expect setbacks in the equity markets,’ she said. ‘We have the luxury of endowment funds that are a very long time horizon for investments.’
‘ Brown said BU avoided endowment liquidation challenges due to sensible planning by BU’s Investment Office and Treasury.
‘ ‘Going forward we will continue our diligence in managing through the recession,’ he said.
‘ College of Engineering freshman Lena Liu said she worries that the drop in endowment investment returns will pose problems for students.
‘It really affects people who get scholarships,’ she said.
Heather Potts, a College of Arts and Sciences sophomore, said she is concerned but thinks BU will make it through.
‘I know that BU is very careful in spending the endowment,’ she said.
Liu also said she doesn’t think the endowment drop is a huge worry.
‘It can only get better from here,’ she said.
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