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Endowments: investing in education’s future – historically African American colleges

With enrollments down, operating costs up, federal research funds disappearing and admission and hiring policies endangered, the best way to coax a smile out of higher education administrators is to mention a single word: endowment.

The reason: dramatic investment successes for college and university endowment funds throughout the academy over the last year.

“It’s a bright spot in an otherwise dismal picture,” says Dr. Richard Ingram, president of the Association of Governing Boards of Colleges and Universities.

The good news includes upbeat notes on endowment fund performances among historically Black colleges and universities. Two HBCUs have endowments with assets valued at more than $100 and two more schools are closing in on the $100 million mark.

Such developments are signals that HBCUs are keeping pace with the higher education mainstream through an increasing financial sophistication.

Like their counterparts in the rest of the academy, minority money managers on campus are using analytic tools that allow them to balance the need to limit financial risk with the urge to get the biggest bang for their bucks.

“Two or three decades ago, the Black schools would invest in extremely conservative instruments, such as certificates of deposits or savings bonds. Now they are hiring professionals to handle the funds for them,” says Maceo Sloan, an African-American investment banker and leading endowment fund manager for HBCUs.

Both Sloan and Ingram are referring to the findings of the 1995 National Association of College and University Business Officers (NACUBO) Endowment Survey, which showed a 15.5 percent average rate of return for endowment funds at 463 colleges and universities sampled.

Endowments, a fund of cash and other assets accumulated from private and corporate donations, are a school’s investment engine and key element of its image.

At a practical level, a skillfully managed endowment yields returns that can, for instance, help keep tuition costs down. At a more lofty level, however, a healthy endowment is critical to a university’s long term survival, the experts say.

“It allows the institution to grow and become more sophisticated and not have to charge every dime in tuition,” says Robert “Danny” Flanigan, Spelman College vice president for business affairs.

Brown University president Vartan Gregorian characterizes his institution’s endowment, now worth an estimated $660 million, as “a trust to be both guarded and enhanced because income from endowment is the keystone of any university’s independence.

“It is the capital that secures the quality and continuity of the university,” he said in Brown’s annual report.

The term endowment covers a variety of funds used as investment vehicles. Because only the interest or other earnings can be spent, an endowment is used to generate funds that can be used to pay salaries, maintenance costs or even some hardware used by a school.

Managing endowments effectively can spell the difference between sustaining a high profile professoriat or laying off staff and canceling courses to scale back operating costs, according to school administrators.

The NACUBO survey showed that endowments at already thriving institutions soared even higher in 1995. For example, Harvard University’s endowment assets grew to $7 billion, while the University of Texas’ fund rose to $5 billion and the University of Chicago closed in on $1.4 billion.

What makes the results even sweeter is that overall, 1994 was a lackluster year for endowments. According to NACUBO’s 1994 study of endowments, the rate of return was a mere 3 percent.

The HBCU endowment successes show that the conservative management philosophy that had opened historically Black schools to criticism in the past can lead to long-term prosperity, when combined with aggressive and informed investing.

The ranks of institutions with endowments worth more than $100 million include Howard University (DC) and Spelman College (GA). Those schools’ funds are worth $152 million and $124 million, respectively.

They lead the pack of HBCU investment successes that, according to both investment counselors and university business officials, reflect the growing financial acumen of minority schools.

Spelman’s endowment racked up a rate of return of 24.8 percent in 1995. The school’s money is spread over the investment landscape. While 44 percent of its portfolio is in the U.S. stock market, 11 percent is in foreign stocks, 6.8 percent is in real estate and the rest in other investments.

At other schools, the portfolio mix reflects different emphases. The Meharry Medical School (TN) $32 million endowment is top-heavy in real estate, with 62 percent of its funds invested in land and only 26 percent in the stock market, according to school officials.

All this is a stark change from the approach taken to endowment investing three decades ago, when HBCUs were scuffling financially even more than they are today.

“There was a time when a school would take its money to two or three good old boys downtown and let them handle it,” Sloan says. Now, a school’s endowment fund is overseen by a board of trustees that is more likely to spread it around to several investment counselors and several types of investments, thereby insulating them from the risk of financial disaster.

One of those investment counselors is Sloan, president of an investment banking firm that handles many HBCU investments.

Including non-collegiate business. Sloan says his firm manages assets totaling $3.5 billion out of his Durham, NC office, including some of Hampton University’s endowment. All but 9 percent of the Virginia university’s endowment is invested in marketable securities, with the rest committed to non-campus real estate.

An endowment industry observer. who asked to remain anonymous, cites Hampton as an example of an endowment that is apparently driven by the vision of the president who has heavy influence over the board of trustees. The investment adviser notes that Hampton’s president, William Harvey — a successful businessman and entrepreneur — is the principal advocate of the school’s investing in real estate deals near the campus, including a large shopping center.

Harvey says that is “an accurate characterization” and explains that “building the endowment was one of my main objectives when I took this job 18 years ago.”

Since assuming the helm at Hampton, the endowment has grown from $29 million to more than $97 million in 1995 and is expected to top $110 million this year, he notes.

The emphasis on a diversified portfolio has meant big dividends for the school, as well as helping insulate it from the ups and downs of the stock market.

That includes participation in such projects as a Pepsi bottling plant in South Africa. Participation in the shopping center. he says, has helped build the local infrastructure, created 150 jobs and has resulted in an annual contribution to the endowment of $1 million a year.

In his view, an endowment, he says, “is that engine that provides stability for an institution and provides the opportunity to take risks …. on curriculum and on people.”

At other schools, investment decisions are forged by more independent decisionmaking bodies.

But at other schools, the investment decisions are forged by more independent decision-making bodies. Another sign of the growing sophistication of HBCU endowment management is the growth of private foundations to oversee the funds at public institutions.

The use of private foundations is a way of encouraging private donors to give while assuring them of both confidentiality and the idea that the money won’t be grabbed by state officials and made part of the public treasury.

At Norfolk State University (VA), the endowment is run by the Norfolk State Foundation, notes Robert Poole, the school’s vice president for development.

As with many minority institutions where the memory of poverty is still powerful among alumni, he says, “we are more conservative than most. I think it’s just part of the notion of being cautious with somebody else’s money.”

The investment market, he says, is a volatile, uncertain place where success sometimes depends on blind luck.

The school’s board of trustees was slow in making a decision just before the 1987 stock market decline that triggered a massive loss in the stock markets. “We were waiting to make a decision on a fund manager on that Friday when the market crashed. We went in (to the market) on the following Monday and looked like geniuses,” Poole said.

Still, the recent era has been good to them, he says, noting that Norfolk State University’s endowment is performing “in the 10 percent range” of return on investment.

The decisions about where to place the money are far more sophisticated now than they were years ago, he says.

Now, instead of farming the money out to friends of board members who happen to be in the investment game, the governing board focuses on what investment counselors call the risk return curve to balance potential risk against the possible rewards of an investment.

For most investment instruments, the curve looks like the letter “J” laid sideways resting on the hook, explains Robert Shepco, NACUBO investment analyst.

The shape of the curve reflects the rising risk associated with high returns on investment and the hooked part of the curve indicates the losses that can potentially occur with the riskiest ventures.

At the same time they are plotting investment strategies, the governing boards are under pressure within their institutions to spend part of the endowment.

Most people outside the community of financial analysts and governing boards are not aware that endowment management rules forbid, or at least severely restrict spending on the principle of the fund.

“They want to know why, if we have a $100 million endowment, can’t we buy computers for all the students or spend some money for more equipment.” says Flanigan.

“If we did that we wouldn’t have an endowment,” he says.

RELATED ARTICLE: Top Endowments at Historically Black Colleges and Universities at End of Fiscal Year 1994-95

Book Value Market Value Institution(*) State (in Thousands) (in Thousands) Howard University DC $138,595 $144.300 Spelman College GA 101,000 133,551 Hampton University VA 86,199 97,441 Morehouse College GA 59,293 67,056 Tuskegee University AL 40,490 42,534 Meharry Medical College TN 32,911 33,680 Dillard University LA 24,523 32,885 Xavier University LA 20,144 20,720 Stillman College AL 16,300 20,150 St. Augustine's College NC 14,833 18,516

SOURCE: Black Issues Survey

Note: Book value is the current monetary value; market value is the price atwhich an investment can be sold.

(*) Information on Clark Atlanta University is unavailable.

COPYRIGHT 1996 Cox, Matthews & Associates
COPYRIGHT 2004 Gale Group

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