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A Tale of Two Endowments

We get some more details on the state of the University's endowment in a new Chronicle article.

The investment team is currently sitting on over $400 MM in cash, and also has made some bold investment moves in putting some money into "specialist credit" and "distressed debt managers". Put another way, the endowment is purchasing a lot of the very same toxic mortgages -- at a deep discount -- that have caused the problems that the world economy is currently experiencing. Given the uncertainty abound in today's economy, it's a risky move, and not for the faint of heart.

Walsh noted that Cornell is less vulnerable to the market's vicissitudes than peer universities, because it doesn't rely on its endowment as heavily as others to cover the operating budget. The endowment pays for about 11 percent of the university's day-to-day expenses, according to Joanne DeStefano, vice president for financial affairs. That's less than half of what some other universities draw from their endowments. "Such schools as Harvard and Yale have relied up to 30 percent to 40 percent on their endowment for several years," Walsh says.

Cornell's endowment managers have been taking several measures to safeguard assets and leverage market opportunities. As the financial markets began to weaken in the fall, they significantly reduced the endowment's exposure to equities and commodities, resulting in a cash position of around 10 percent at the start of 2009. This not only slowed the decline of the endowment's value as the market weakened, it also provided money to increase investments in specialist credit and in distress debt managers.

We also hear the repeated mantra that Cornell depends a lot less on its endowment than other schools, as we noted a couple of months ago. So let's flesh that out a little bit more:

All told, Cornell expected around $310 MM in revenues from investment income this year, or around 5.5 percent of its $5.5 billion endowment and around 11 percent of its $2.9 billion budget. A 30 percent decline in investment income would therefore be associated with a revenue hit of ~ $100MM, or around 3.5 percent of its operating budget.

By contrast, a school like Princeton has a budget of $1.3 billion, of which half -- $650 MM (!!) -- comes from investment income. A 30 percent decline in investment income would therefore be associated with a revenue hit of ~ $215 MM, or around 17 percent of its operating budget.

The difference maker, though, is that Princeton can afford to eat into its endowment -- as both schools are currently doing -- for a longer period of time. At its peak, Princeton's endowment was sixteen times its annual operating budget, while Cornell may have reach a multiple of 2.

Of course, though, Princeton should really be asking itself what value it has gotten out of all of its endowment money. Cornell -- despite being one third as rich as Princeton -- has been able to educate more students in more disciplines while conducting more research than Princeton. And that's something we should all be proud of.

Matthew Nagowski | Posted on January 28, 2009 (#)

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