An exegesis of the endowment

By Jakob Wartman

Along with tuition, there is no greater source of revenue than the college’s $530 million endowment. Contributing some $24.2 million to Macalester’s $67.8 million 2005-2006 operating budget, the endowment keeps facilities maintained, faculty paid, and tuition affordable. Just 10 years ago, Macalester had one of the largest endowments of all liberal arts colleges. The future looked bright for the school, but recent years have proven to be quite tremulous for the funds. For most of the recent past the funds have been plentiful, but untouchable to the college.

Macalester has been particularly fortunate to receive an endowment valued around $400 million given in Reader’s Digest stock to the institution from the late DeWitt Wallace 11.<br /><br /> The college received the stock in 1980, but they were not of significant value until Reader's Digest went public in 1990, Chief Investment Officer Craig Aase70 said. During the next 12 years, the college slowly gained permission to sell these stocks in stages until the last Reader’s Digest stocks were sold in 2002.

The money that was tied up in Reader’s Digest stock was subject to a changing market. By the time Macalester was able to diversify its holdings the market value of Reader’s Digest had slipped, putting Macalester’s endowment in the middle pack of the elite liberal arts colleges.

“It is sensible stewardship,” Professor of Mathematics and Computer Science Daniel Kaplan said. “You can’t put all your eggs in one basket.” Unfortunately for Macalester this was the case during the last decade. Growth stalled and the endowment went relatively unchanged as the overall economy surged.

During the last 10 years, schools have incurred great financial gain from booming investments. Grinnell College is a prime example. Grinnell’s endowment has tripled over the past decade, from $478 million in 1995 ($22 million less than Macalester’s 1995 endowment) to $1.29 billion, leading the small liberal arts colleges and ranking 36th among all schools. Since that time Macalester has only grown by only $30 million due to the difficulty in diversifying and capitalizing on the market.

The last decade saw a dramatic shift in the importance of endowments. Public universities were forced to grow their endowments after lagging public support. And private colleges realized the benefit of the extra capital significant endowments afforded.

“The success of the market in the 90s created a growing revenue stream that has become self-perpetuating,” Aase said.

Today, Macalester’s endowment is still the 15th largest among liberal arts colleges according to the college’s Office of Institutional Research. But it is no doubt unfortunate Macalester was unable to plan and capitalize on the rapid market growth of the late 90s. While most colleges saw increases up to three fold in the nominal value of their endowment, Macalester stayed relatively stagnant.

The endowment currently rests at around $530 million, Aase said. Of that $530 million, 32 percent is invested in domestic stocks, 23 percent is invested in foreign stocks, 17 percent in U.S. Treasury Bonds, and the rest is invested in alternative investments.

“These alternative investments include stuff like real estate, oil and gas, private capital, and hedge funds,” Aase said.

Unlike the Annual Fund, money from the principle of the endowment is left untouched. The college only utilizes a portion of the interest accumulated from the endowment.

The college’s endowment is currently managed by 20 to 30 financial managers (the number varies month to month). These managers are completely independent of Macalester and most of the managers work with Macalester’s alternative investments.

Much of the publicly traded stocks the college holds are invested in three domestic stock indices; Standard and Poor’s (S&P) 500, the Russell Growth Index, and the Russell Value Index, said Aase.

Among these funds are corporations such as Guidant, Halliburton, Coca-Cola and Wal-Mart, corporations many Macalester students consider politically and socially irresponsible.

Because of this the college has come under pressure from students to make information available on the identity of Macalester’s holdings.

Traditionally financial managers like to keep this information secret, not to downplay social responsibility but to avoid revealing their investments to competing managers and firms, Kaplan said.

The prospects of social responsible investing are complicated by the fact that most companies divest profits and capital into the stock market. This creates a web of interaction almost impossible to sift through.

In terms of creating screens or avoiding companies, the college has given the financial managers much freedom. “We’ve chosen not to constrain our managers,” Aase said.

This summer both Harvard and Stanford Universities divested their holdings of PetroChina because of their business operations in support of the Sudanese government. Using statistical data based on the endowment and market size Kaplan was able to calculate that around $10 to $20 of Macalester’s endowment could be indirectly supporting PetroChina.

“How much moral obligation do we need?” Kaplan asked. Kaplan said he worries about constraining potential investments in order to find small amounts of direct or indirect investments.

The college currently utilizes proxy voting indicating to the managers how to vote on critical issues.

Historically Macalester has divested from some socially irresponsible corporations. The 1980s saw Macalester diverting funds from corporation operating out of South Africa to collaborate in the world sanction of South Africa.

But the largest challenge with socially responsible investing is the fact people have different values. This is especially true for the diverse and socially conscious campus like Macalester.

Possibly, a more problematic situation the endowment and invariably the college will face is sustaining the endowment against the current markets, particularly matching inflation.

It is a possibility that the college could switch markets to more closely observe and control its investments, but this would limit the return Kaplan said, affecting the college’s future.

To be sustainable the endowment must keep returns between 9 to 10 percent to keep up with inflation and adequately fund the college’s operating budget. If the return was to fall 1 percent that could amount to an $8 million budget decrease.

The college currently takes around 5 percent from the total endowment, Aase said. Many including Kaplan and Aase indicated that lowering the amount taken from the return would be beneficial for the future of the endowment and the college.

If we took a much greater percentage of the capital, the college could run for the next ten years, tuition free, Kaplan said. But the future of the endowment would be destroyed.

No doubt these situations deserve attention from the college and its community. Social responsible investing and sustainable investing pose the problem of balancing present and future needs.

What we do now affects those 20 to 30 years in the future. We must take care to ensure the quality of Macalester will continue for years to come.