NU reports substantial increase in endowment

Sheila Burt

After losing money for three consecutive years, the total market value of Northwestern’s endowment increased during the 2003 fiscal year, which could mean more money for programs in the future, university financial officials said.

The total value of NU’s $3.5 billion endowment increased by 8.1 percent from September 2002 to August 2003, said Eugene Sunshine, NU’s senior vice president for business and finance. During the overlapping calendar year, the endowment grew 16.5 percent from Jan. 1, 2003, to Dec. 31, 2003, Sunshine added.

“What it means is that over time there will be more money taken out of the endowment to support university operations,” Sunshine said.

The growth — solely from investment gains — added a glimmer of hope that the 2004 fiscal year will end in positive returns for NU.

After an economic boom in the 1990s, endowments at several major universities quickly increased, but they soon faced sharp declines as the economy weakened. According to the National Association of College and University Business Officers, the average investment pool lost 6 percent in 2002. The 2002 report is based on responses from 654 institutions.

NU’s investments lost almost $180 million during the 2002 fiscal year– about a 7 percent decrease.

“The market had three bad years, so it’s just now coming back,” said William McLean, NU’s vice president and chief investment officer.

NU’s investment growth is not unusual compared with that of other universities, said Damon Manetta, manager of external affairs for the National Association of College and University Business Officers.

“From what we’ve seen for our report for fiscal year 2003, they’re experiencing positive returns,” he said.

Manetta said the prospect of positive returns for the 2004 fiscal year comes at a time when universities are “struggling to make an end payment” after a couple of years of negative returns.

McLean attributed NU’s substantial growth to the diversity of the university’s portfolio, including venture capital, bonds, real estate and hedge funds, which are loosely regulated funds for wealthy investors that can gain or lose money independently of the markets.

McLean also said the university made a number of changes last year to help investment returns on the endowment. For example NU employs a practice of active management, which requires picking several individual stocks rather than an index.

Although the investment increases are good news for NU, both Sunshine and McLean said market fluctuations make it too early to tell whether the fiscal year, which ends this August, will report positive returns. It could take up to two years to show substantial gains, McLean said.

“For the fiscal year to date, we’re off to a good start,” McLean said, “but you never know. We still have eight months to go.”

Even if the fiscal year ends positively, more money for university programs may not be taken out of the endowment until later years.

To protect against market fluctuations, NU uses a spending formula that looks at multiple years to create “smoothing effects,” Sunshine said.

Sunshine and McLean said the amount taken out of the endowment depends on long-term growth.

“We want to make sure future generations are treated well just like the current ones are,” McLean said.

Universities across the nation report similar outlooks for their endowment returns as the economy grows.

Steven Gill, a budget director at Princeton University’s Office of Budget, said the university’s $8.4 billion endowment saw an 8 percent rate of return at the end of June.

Gill said the downturn of recent years pressured the university to keep spending low, so signs of positive returns are welcome.

“In a sense,” Gill said, “you have some ground to make up.”