Endowment decreases after underperformance, deficit spending


Daily file photo by Colin Boyle

Rebecca Crown Center. A volatile market and deficit spending left the University’s endowment with less money than last year.

Gabby Birenbaum, Print Managing Editor

Northwestern’s endowment decreased from $11.08 billion to $10.8 billion in the 2019 fiscal year,after its long-term balance pool underperformed relative to expectations and a withdrawal to offset the University’s budget deficit.

The reduction marks only the second time in 10 years that the school’s endowment has decreased year-to-year and is the largest in that time frame. It remains higher than 2017’s $10.5 billion value.

The endowment, which is held in a policy portfolio primarily made up of private investments, absolute returns and US and international equity, gained $295 million last fiscal year, a growth of only 2.5 percent and an underperformance of 4.6 percent. Endowment spending far outpaced those gains. Primarily driven by spending toward the operating budget to compensate for the prior year’s deficit, $589 million was withdrawn from the endowment.

Overall, 5.2 percent of the endowment was paid out this fiscal year — lower than the past two years, but still significantly higher than the five-year period preceding the initial budget deficit.

In the University’s 2019 financial report, chief investment officer William McLean said investments in equities, real assets and absolute returns were “drags” on the endowment’s performance, and that the meager gain was posted in a “volatile environment” in which the MSCI ACWI Index — which measures equity-market performance — fell 0.3 percent during a market crash in December 2018. In a recent interview with The Daily, senior vice president for business and finance Craig Johnson said the endowment “certainly recovered, but not enough to overcome the deficit” from the December market crash.

Johnson said while the endowment always fluctuates, the operating budget is fixed, necessitating the withdrawal from the endowment — an approach he said was “not sustainable.”

According to the financial report, the endowment is expected to underperform for both three- and five-year windows relative to internal benchmarks, but ultimately recover to overperform for 10- and 15-year time horizons.

“Despite continued concerns that expected returns in the next 10 years will be lower than in the previous decade, Northwestern leadership retains its long term focus and is confident in the portfolio’s prospects,” McLean wrote in the report.

University officials also want to restructure the endowment portfolio in coming years, investing more in high-yield credit, which currently only makes up 2.4 percent of holdings, and seek liquidity on some private investments, which are 26.4 percent of the portfolio — the largest investment category. Investment managers are targeting a 22 percent portfolio share for private investments, and attributed the overweight to strong performances and venture capital managers holding portfolio companies for longer periods of time. The endowment’s reliance on private investments has increased 6.3 percent since 2016.

Uncertainties related to the federal endowment tax passed in the Tax Cuts and Jobs Act of 2017 — President Trump’s signature legislation — also loom over its prospects. Initially passed as a means of levying a 1.4 percent excise tax on the previously-exempt endowments of private universities, the law has been tied up in the U.S. Treasury Department and Internal Revenue Service as feds try to create rules and universities lobby against it.

Johnson said he expects final guidelines to be set in April or May, meaning the University would be subject to it this fiscal year. The tax, likely to cost $5 to 10 million for Northwestern assuming good returns, is expected to be levied on non-operating revenues and expenses, meaning while the operating budget would not be affected, total returns would be diminished and less money would be available.

“It’s a hit,” Johnson said. “And it just means we can’t put that money towards financial aid or scholarships.”

Correction: A previous version of this story misstated the expected value of the endowment tax on Northwestern’s endowment as $150 million. The tax is only on returns posted by the endowment, making its likely value between $5 and $10 million in a year with returns at expected rates. The Daily regrets the error.

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