Endowment sees renewed growth

By Henry Deng     11/4/10 7:00pm

For fiscal year 2010, which ended on June 30, the Rice endowment was measured at $3.79 billion, up from $3.61 billion at the end of fiscal year 2009. According to Interim Vice President of Investments and Treasurer Ron Long, the return on the endowment was an increase of 9.9 percent, as opposed to a loss of 18.2 percent during the previous fiscal year. According to Long, the $3.79 billion is calculated by taking the figure from the year before, adding investment returns on the year ($358 million) and cash gifts ($36 million) and subtracting the amount distributed to the university for spending ($221 million).

Long said the increase on returns this year can be attributed to appreciation in three key sectors, all of which are impacted by the U.S. economy's performance. The three factors causing the increase in the endowment were capital appreciation in the publicly traded equity portfolio, capital appreciation in the fixed income portfolio and appreciation in the hedge fund portfolio, Long said.

According to Long, the market value of the endowment trended upward from July 2009 to April 2010 with the positive performance of equity markets. Around May, however, concern about a double-dip recession caused financial markets to decline in value and the endowment value to fall, though not by enough to erase gains on the year.

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From July through October, Long said the markets have been steadily appreciating, though a significant portion of the fiscal year, which goes through June 2011, remains.

When asked about future expectations for the endowment, Long said there is no specific number that the university targets for earnings. According to Long, the overall goal of the endowment is to earn enough to provide for the annual distribution to run the university every year plus compensate for inflation; to do so, the endowment is diversified across many asset classes and sectors to try to account for all market conditions.

"We think of the endowment as a perpetuity," Long said. "We hope that it's going to be there forever to support university operations."

Money is taken out of the endowment every year to distribute as part of Rice's budget in order to finance the university. According to Vice President for Finance Kathy Collins, Rice's endowment spending policy, approved by the Board of Trustees, says that the amount budgeted from the endowment each year should be in the range of 4.5 percent to 5.5 percent of the average market value over the last three years. In addition, the spending rate should not drop below 4.5 percent or exceed 6.5 percent.

Because the endowment's value had dropped 18.2 percent in fiscal year 2009, the percentage of the endowment spent increased. In addition, the FY 2009 market value is part of the three-year average used in planning the FY 2010, FY 2011 and FY 2012 budgets. The spending rate was 5.35 percent in FY 2010 and is projected to exceed 5.5 percent for a period of time, depending on market returns. Collins said that the objective is to bring the spending rate back within the target range by FY 2018.

Over the last few tough economic years, the university had endured budget cuts across the board, though Collins said the university did not cut financial aid to students or residential college funding. The endowment supports about 45 percent of Rice's budget, with the other 55 percent coming from tuition, revenue - net of financial aid, the Annual Fund, restricted gifts, grants and auxiliary revenues, such as room and board. About two-thirds of the budget supports salaries and benefits for Rice's faculty, staff and student workers and stipends for graduate students. With the endowment recovering, the university hopes to avoid more across-the-board budget cuts, provided that endowment market value returns are strong, Collins said.

This fiscal year, Rice underperformed its institutional peers with a return of 9.9 percent, whereas other large private university endowments returned approximately 12.4 percent on average, Long said. However, Long pointed out that in fiscal year 2009, when U.S. stocks were down 26 percent and world markets were down 30 percent, Rice lost 18.2 percent on its endowment while other universities lost more. Over a two-, three- or five-year period, Long said that Rice compares favorably to its peers.

"It's unrealistic to expect the endowment to outperform every year in every market condition," Long said. "So, if your endowment is positioned so that it loses less in a bad year, it likely won't make more in a good year. But looked at over a longer period of time, our performance has been right on top of that of our peer group."

Rice does not invest any of the endowment money internally; rather, the university hires managers to invest it. Long said that these are professional, institutional-quality investment managers who work with large sums of money with lower pricing fees than retail money managers. They invest for other universities as well but cannot be disclosed by Rice due to confidentiality policies.

The chief investment officer assumes a critical leadership position in the management of the endowment. The university's Board of Trustees is currently conducting a search for a new chief investment officer, as former Vice President for Investments and Treasurer Scott Wise left Rice at the end of last fiscal year to work for TIAA-CREF.

According to Long, the departure of Wise has not affected the endowment at all because the assets are still invested the same way. However, Long said that with new leadership, there may be some changes as a result of a fresh perspective on the endowment.

The endowment figures are as of the end of each fiscal year because that figure is audited. Data from fiscal year 2010 were released last week after auditing by Pricewaterhouse Coopers.

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