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November 7, 2002

Endowment investments fall 10.9% over two years

Pitt’s endowment investments fell in value by almost 11 percent over the last two fiscal years, mainly because of plunging U.S. stock prices.

For the fiscal year that ended on June 30, 2002, Pitt’s endowment investments declined by 5.3 percent. However, the endowment’s total value actually increased from $1.10 billion to $1.15 billion. That’s because investment losses were exceeded by transfers of gifts and quasi-endowment funds into the endowment, said Arthur G. Ramicone, Pitt vice chancellor for Budget and Controller.

During the previous fiscal year (the one that ended on June 30, 2001), Pitt endowment investments fell in value by 5.6 percent. It was the first loss after a growth spurt that saw the endowment soar in value from $463 million in 1995 to more than $1 billion five years later, due mostly to the late-1990s stock market boom.

Pitt’s FY 2001 endowment loss was larger, percentage-wise, than the average loss (3.6 percent) that year among 610 institutions surveyed by the National Association of College and University Business Officers. NACUBO’s survey indicated that, for the first time in a generation, the average college endowment in FY 2001 lost value.

NACUBO won’t complete its FY 2002 survey until late December, said Damon Manetta, the association’s manager of external affairs. “At this point I can’t offer any hard data for FY 2002,” he said. “But from what we’ve been told anecdotally, the average higher education endowment experienced another year of single-digit negative returns.”

Pitt’s 5.3 percent endowment investment loss last year “probably was about average” among U.S. colleges and universities, Manetta said. “What’s safe to say is that, for most institutions, last year was similar to FY 2001. That is, if the market value of your endowment fell by 5 percent in FY 2001, it probably fell by about the same percentage in FY 2002, just because most investments — common stocks, corporate and U.S. government bonds and so on — declined by approximately the same percentage during both years.”

According to Manetta, the only higher education endowments that did well during the last two years were those that invested heavily in alternative holdings such as hedge funds and precious metals, rather than domestic stocks.

Among universities with endowments of $1 billion or more, Yale University posted the largest percentage increase during FY 2001 — 9.2 percent. Yale invested just 15 percent of its endowment in publicly traded U.S. stocks that year, compared with Pitt’s 40 percent.

In March 2001, Pitt trustees approved a three-year plan to diversify the University’s portfolio. It will reduce Pitt’s investment in domestic stocks to 30 percent of the endowment total, while doubling the allocation in alternative investments to 20 percent (10 percent in hedge funds and other “marketable alternatives” and 10 percent in “non-marketable alternatives” such as venture capital and buyout funds).

“Once you decide as an institution to reallocate your assets, it can be a long process,” Ramicone said. “Sometimes, the funds you want to invest in are closed. Other times, you have to spend a lot of time reviewing legal documents and doing your due diligence before you place money.”

While U.S. stocks were Pitt’s “worst-performing assets” during the last two years, Ramicone said, “no one can predict which asset classes are going to do best in the future. The best advice is to diversify. If we diversify and stay patient, we should weather the storm.”

The University’s investment returns for the first quarter (July 1-Sept. 31) of the current fiscal year, while not tabulated yet, appear to have been “pretty lousy,” Ramicone recently told the University Senate’s budget policies committee.

— Bruce Steele

Filed under: Feature,Volume 35 Issue 6

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