UA Foundation: No time to panic
Posted on Sunday, November 30, 2008
The University of Arkansas Foundation Inc. is taking hits amid the market slump, but its leaders say it’s too soon to consider changes to spending policies or investment strategies.
“This has been a tough period for investors everywhere, and we haven’t been immune,” said Clay H. Davis, executive director of the foundation, which manages the endowment holdings of several University of Arkansas System campuses.
Preliminary numbers show that holdings dipped by about 13 percent between June 30, the end of the 2008 fiscal year, and Sept. 30, the end of the first quarter of fiscal 2009.
“We would expect it to be down a similar amount in October,” Davis said.
But he believes leaders of the foundation and the universities will wait for a mid-January report on the first two quarters of the 2009 fiscal year before contemplating any changes.
“We are a perpetual source of funding for the University of Arkansas System, and by virtue of that we are the longest of long-term investors,” Davis said.
An endowment is like an ongoing investment savings account. All or part of its interest earnings can pay for scholarships, salaries, endowed faculty positions, faculty research, academic programs and other needs, although UA managers typically want to plow part of the interest earnings back into principal to ride out market lows.
University donors who choose endowments over onetime gifts can make a long-term impact.
The foundation’s endowment pool consists of thousands of individual endowment accounts, Davis said.
According to the foundation’s most recent annual report, its endowment assets for academic programs decreased in market value for the first time in five years, dropping to $ 1. 12 billion from $ 1. 17 billion in fiscal 2007.
“The credit crisis that manifested itself during [fiscal year ] 2008 negatively impacted the foundation’s investment returns for the fiscal year,” Davis wrote in the annual report.
The overall investment return dipped for the first time during the five-year period — a 1. 2 percent drop — after growth of between 10. 5 percent and 19. 9 percent in the other years.
Despite the dip, spending for academic support continued to grow, from $ 26. 6 million in fiscal 2004 to $ 45 million in fiscal 2008.
“We already know the massive de-leveraging that has led to slowing global growth and the recent extreme market turmoil will negatively impact the foundation’s [fiscal year ] 2009 investment performance and, indeed, has tempered our expectations for endowment returns beyond FY 2009,” Davis wrote in the report, adding that the foundation’s primary defense in the volatile market will continue to be a strong, diversified portfolio.
Earlier this year, officials at the UA System’s flagship campus in Fayetteville said their campus houses some of its endowment accounts with the UA Foundation but that it has at least one foundation of its own.
The Fayetteville campus’s total endowment holdings were down to $ 839, 856, 256 on June 30, said Brad Choate, vice chancellor for university advancement.
That decrease from fiscal 2007 ’s total of about $ 877 million was neither surprising nor alarming to UA officials.
“It’ll be back; it’s just a matter of when,” Choate said.
The campus’ long-term growth over the past dozen years has been mostly on an upward trajectory.
On June 30, 1997, a day before John A. White began work as chancellor, the endowment total stood at $ 119 million.
Aside from decreases in fiscal years 2001, 2002 and the one in 2008, there has been growth. The roughly $ 840 million endowment total posted on White’s last day as chancellor was more than seven times what he inherited.
G. David Gearhart, who succeeded White earlier this year, served as White’s vice chancellor for university advancement starting in 1998 and was the chief architect of White’s seven-year, $ 1 billion fundraising campaign.
Choate said universities ’ endowment holdings aren’t managed like many individuals manage their investments, and university managers don’t even think of them in the same way.
“There’s a difference in the way you and I might handle a retirement investment” and the way universities handle their endowments, he said. A university isn’t working toward a “retirement” or other event that would trigger a massive increase in spending of investment principal.
“The university truly manages for the long haul,” Choate said of his campus and of the UA System’s foundation in general. “They have a long-term investment strategy... to smooth out the peaks and valleys.”
One component of this strategy includes refraining from spending all the interest earnings, instead reinvesting a portion of the earnings into principal.
“With an institution like a university, it’s here forever,” Choate said.
Davis agreed.
“We benefit from this longterm horizon,” he said. “We maintain a very diversified portfolio of nine asset classes.” Davis added that the foundation also invests in private markets, which aren’t subject to market conditions.
“The public markets have been way down,” Davis said.
As of June 30, the foundation had allocated its total returnpool asset into the nine asset classes in this manner: 26. 1 percent in U. S. equity, 17. 6 percent in international equity, 19. 3 percent in marketable alternatives, 5. 9 percent in nonmarketable alternatives, 10. 6 percent in fixed income, 0. 3 percent in cash and cash equivalents, 12. 5 percent in natural resources, 4. 6 percent in emerging markets and 2. 9 percent in real estate.
Other campuses that house endowment accounts with the UA Foundation include the University of Arkansas for Medical Sciences, the University of Arkansas at Little Rock, the UA System’s Division of Agriculture, the University of Arkansas at Pine Bluff, the University of Arkansas at Monticello and University of Arkansas Community College at Batesville.
In January, the Fayetteville campus was among 136 of the nation’s wealthiest public and private higher education schools that became part of a U. S. Senate Finance Committee inquiry into how they manage their endowments.
The senators cited tuition rates that were rising faster than inflation and a study showing explosive college endowment growth, and said they were considering a potential payout requirement for endowments.
The Fayetteville campus responded that its donors had placed permanent spending restrictions on 98. 6 percent of its endowment holdings.
This week, Davis said about 98 percent of the UA Foundation’s endowments are restricted as well.
Davis wrote in the annual report that the Senate inquiry was among a number of challenges the foundation faces in the coming year.
“Public higher education continues to face scrutiny from the public and policy makers on a variety of issues such as governance, accountability, endowment management and funding,” he wrote.
He pledged the foundation will maintain “the highest levels of accountability, transparency and fiscal responsibility as we work to meet the expectations of our constituents and preserve the trust placed in us by donors to the University of Arkansas System.”
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