Inside the Endowment
by Amy L. Stankiewicz

Oberlin's endowment, with a December 31, 2002, market value of $481.4 million, is a collection of 1,200 invested funds established to provide and protect in perpetuity scholarships, professorships, research initiatives, library holdings, art collections, and more. It is a key indicator of the College's educational quality, financial strength, and institutional stability.

Although proactive planning has kept endowment earnings ahead of the curve when compared to other colleges--Oberlin ranked in the top 6 percent in investment return rates over the past three- and five-year periods--recent slow-growing rates of return are the new economic reality. According to the National Association for College and University Business Officers (NACUBO), educational endowments valued between $501 million and $1 billion had a net return of minus 5.3 percent in fiscal year 2001-02.

While Oberlin's endowment's value of $519.6 million in June 2002 was well above the earning projections made five years ago, stagnant return rates in the last two years are now causing havoc on the operating budget. Oberlin, like other colleges, has a spending policy that caps the percentage of money that can be transferred from the endowment every year to support operations. The average transfer--or payout rate--for colleges and universities is around 5 percent.

To smooth out the short-term effects of the market's volatility--up or down--annual withdrawals are based on the endowment's average value over three years. In most cases, two good years can make up for a single bad one. But with Oberlin's endowment suffering from two straight years of negative returns, there will be no boom year to cushion the three-year average, effectively flat-lining the endowment's contribution to annual operations.

"This has real implications for Oberlin's budgets over the next few years," says Oberlin College President Nancy S. Dye. "This year our endowment spending policy provides $34 million in expendable income, which we use for scholarships, faculty and staff salaries, and other programmatic and general operating support. For the next several years, it will be less. This creates a tough budgetary situation, because the amount we can draw from the endowment, our second-most important source of income after tuition, will decline, while our costs for health care, salaries, energy, library materials, and other necessities will continue to rise."

Oberlin is far from alone. Higher education as a whole is struggling with the same financial woes, and college investment officers are scrambling to reevaluate their short- and long-term growth strategies. Oberlin's endowment is guided by the Board of
Trustees' investment committee, composed of seasoned investment professionals, trustees, and two Oberlin economics professors. Member Leah Modigliani '86, a global portfolio strategist at Morgan Stanley, says that everyone takes pride in the committee's open, dynamic, and "true-to-Oberlin" focus on individual opinions and debate. "Many difficult decisions need to be made, mostly regarding asset allocation and the hiring and firing of money managers," she says. "In true Oberlin style, dissent and individual opinions are welcome and lead to a deeper understanding and often lively debate of the most important issues."

Committee members maintain regular communication with each other and meet quarterly as a group. They have a proactive investment approach: rather than reacting immediately to sharp changes in the market, they focus on long-term strategies, such as deciding which endowment funds are best suited for conservative investment, and which are most appropriate for higher-risk markets.

"Our goal is to set aside and take almost no risk with funds needed for the near-term running of the College, but to take some risk--and get properly rewarded for that risk--in the broader fund," Modigliani says. "We try to stay ahead of the current thinking." A significant portion of Oberlin's endowment is invested in alternative assets, such as hedge funds and private equities, which have yielded greater returns for college endowments recently than have domestic equities.

"We were in these alternative assets with schools like Harvard and Yale long before most endowments and other investors who are just building up their assets were," Modigliani says. "Now, however, the committee is considering exiting these areas. As more and more money goes into these assets, the concern is that our managers will no longer be able to outperform."

Modigliani and fellow committee member Myron Szold '56 credit the investment committee of the early 1990s for enabling the strong performance of Oberlin's endowment in recent years. "There were some very poor investments made in real estate a while ago, and it took years to clean up the portfolio," Modigliani says.

"We don't expect the current financial situation to get any worse, but we also don't expect it to get better very soon," adds Szold. "We keep looking for that secret weapon that will guard against economic downturns, but we don't think we'll find it. The endowment is for today, for tomorrow, for always. We'll keep changing our investment strategy as needed, and we'll keep striving to increase our risk and our returns."

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