While the last couple of years have been increasingly difficult for many endowments, the New Year presents new opportunities and an ideal time to review the portfolio rigorously and set a new investment course.

For many endowments, that rigorous review and fresh start is definitely needed right now.

According to the Chronicle of Higher Education, the average college endowment lost 23% of its value from 2008 to 2009 combined with a precipitous drop in giving.  In 2009 alone, the average endowment investment lost 18.9%, which is the worst performance in the history of the study which began in 1971.

With a deteriorating economy, almost half of educational institutions saw an increase in endowment spending while only one quarter decreased aid.  At the same time, 60% of institutions reported an average drop 45% in giving to their endowments.

If there is such a thing as a triple-edged sword, this would be it; need is up, alumni giving is down and investments lost value.
So what steps can the managers of an endowment take in these circumstances?

Endowments are established to generate enough return to support the goals of the institution or organization they serve.  The annual return is extremely valuable when unexpected costs arise, or when, during exceptionally difficult economic periods, budgets do not cover run-of-business costs.

In times like these, when endowments are not performing well, it makes excellent sense to concentrate on two things:  energize the capital campaign, ie, raise more money, and take a rigorous look at the investment portfolio.

An energized capital campaign should be specific:  discuss specific needs and specific outcomes.  Tout the positive contributions that donors have made to both the lives of students and the legacy of the school.  For instance  donors in the alumni association may want to talk about athletics and increased donations for uniforms, equipment, travel or even stadiums.  Welcome their donation and earmark it for precisely that.  Donations that are earmarked to cover specific projects may replace monies that have been budgeted for that and free those funds up for other financial needs.

Next, take a look at that investment portfolio.  While ‘modern portfolio theory’ handles risk mainly through diversification, a more active approach to risk management is in order.  Diversification of assets is the first step but, some times large portions of the portfolio move in the same direction – unexpectedly.

Your investment policy should be flexible enough to allow for the active reduction of risk.  Long-term passive management misses one important tenet of risk management ‘Gains that accumulate over time can be lost in a moment’, safeguard your returns where possible.
Too often when we look at our investments after we have taken losses, the first thing that we think of is how to recoup that loss.  That often leads us into taking too much risk or into making bad decisions by ignoring another tenet of active management: ‘lost opportunities are easier to make up than lost capital’.

We should focus instead on our risk tolerance and the time horizon needed to meet our investment goals, not how to make up lost money.

Finally, be sure to bring the spending policy in line with the investment policy and a realistic appraisal of the ability to raise new capital.  By setting appropriate capital goals in fund raising, investment and spending, we can better cope with the long term need of the education institution or organization.

Mark Stys is the Chief Investment Officer for Bluemont Capital Advisors, LLC. To discuss how to energizing your endowment, please contact Mark at mstys@bluemontcapital.

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