Endowment plummets amid market crisis

By Matt Day

One year after reaching $700 million for the first time, Macalester’s endowment has lost more than 20 percent of its value in the financial crisis threatening the global economy.Chief Investment Officer Craig Aase ’70 said that as of Oct. 20, his office estimated the endowment’s value to be $550 million, down $150 million from its peak in October 2007.

The endowment, the product of years of gifts to the college and the college’s investment of those gifts, provides about a third of Macalester’s yearly operating budget. The college’s other chief sources of income are tuition and donations to the annual fund.

Macalester Vice President of Administration and Finance David Wheaton said that the college administration will not make any immediate cuts in response to the losses.

“We’ll be fine in the short term,” he said, noting that the real effects of the downturn will be felt in the years to come. The college commits about five percent of the endowment each year to the operating budget, a figure that is calculated by averaging the endowment’s value over the preceding four years.

“We’ll look at this over a two or three year period,” Wheaton said. “The formula takes some time to work [losses] into the budget.”

Wheaton and other administrators stressed that despite the drawback, the college was in sound financial shape for the time being, and that students shouldn’t expect a serious change in college operations or financial aid’s ability to meet student need.

Protecting investments

The loss reflects the stock market’s dismal performance in the last year. Since peaking in Oct. 9, 2007, with a closing high of 14,165, the Dow Jones Industrial Average has lost nearly 40 percent of its value, falling to 8451 on Oct. 10, 2008.

The Dow’s performance in September and October was the worst since the Great Depression, with the market posting losses of at least 500 points on five separate days.

“It seems to change daily,” Wheaton said. “The volatility is not like anything we’ve ever seen before.”

Wheaton said that Macalester’s endowment is diversified to protect it from downturns in specific sectors of the economy; a lesson the college learned 15 years ago with the decline of Macalester’s Reader’s Digest assets.

The endowment owes much of its value to Dewitt Wallace ’11, who founded Reader’s Digest and left a substantial amount of company shares to the college upon his death in 1981. The shares shot-up in value when Reader’s Digest became a publicly traded company in 1990, and Macalester boasted the largest endowment of any liberal arts college in the country in the first half of the decade.

Decline in the stock’s value and restrictions on Macalester’s ability to sell its assets stunted the endowment’s growth for nearly 10 years after its first public offering. Growth resumed as Reader’s Digest assets were slowly liquidated and placed into more stable funds.

Despite the recent diversification, the endowment is still tied to the performance of the stock market. Aase, who is charged with monitoring and adjusting Macalester’s investments, said that as a matter of policy 45 percent of the endowment is invested in or exposed to global stock markets. Fifteen percent is held in bond markets, Aase said, and the rest is in “alternative assets like real estate, energy assets, private capital and hedge funds.”

Some of Maclaester’s capital was invested in the Short Term Fund, a $9.3 billion investment managed by the Wachovia Corporation. Under stress from the collapsing credit market, Wachovia announced Sept. 29 that it was eliminating the fund and restricting the amount of money the more than 1,000 participating colleges could recover at a time.

Wheaton wouldn’t say how much Macalester had invested in the fund, but said that the college would have access to about 60 percent of its investment by the end of the year. He said that Macalester has other short-term funds it can call upon.

“The Wachovia fund is not a problem,” he said. “We have other sources of liquidity.”

Aase said that Macalester’s diversity of investments have shielded the endowment from the worst of the crisis, noting that the alternative assets tend to do well when stocks slide.

“As a result, our portfolio decline is roughly half that of the market’s,” he said, indicating that the endowment fell 20 percent in the same period that the Dow dropped 40 percent.

Wheaton said that Macalester would share the Dow’s pain so long as the market remained unstable. “If the stock market keeps going down it will get worse,” he said. “It’s still a down draft. It’s something we’re paying close attention to. It’s real.”

Using the scalpel, not the hatchet

The success of the endowment relative to the broader market will not save Macalester from budget cuts down the road.

Speaking to Macalester College Student Government on Oct. 14, President Brian Rosenberg used the “scalpel” budget cut metaphor popularized by the presidential campaign to indicate that the college administration prefers a more delicate set of changes to the budget.

“We’re trying to avoid taking blanket measures,” Wheaton said. “We’re trying to be more targeted than that.

“We’ll look at spending in all kinds of places to ask where we have some discretion,” he said. “When we put in place programs, people expect them to continue.

“What we’ll be doing is taking a look at what we’re doing now, and we’ll do it with an eye in part to asking if we’ve been doing things for a long time that are no longer central to the mission of the college.”

Rosenberg told MCSG members that his priorities for the college budgets of the future are to continue to strengthen academic programming, ensure that faculty and staff benefits are safeguarded and keep the college affordable for students.

The student burden

Rosenberg said that Macalester’s tuition would be held down to ease the load on students and parents. He told MCSG members that the comprehensive fee increase for the 2008-09 school year would be about four percent. The 2007-08 increase was seven percent.

Director of Financial Aid Brian Lindeman said the losses will not hurt the ability of his office to meet student need, at least for the first year. Much of the financial aid budget comes from endowment returns, but Lindeman said that he is not worried.

“We’re in [the budgeting process] right now,” he said. “We don’t anticipate a major change in the endowment support we have for financial aid. In terms of talking with families, if someone has had a job loss or significant change, we’ve always had a mechanism for that.”

Lindeman said that Macalester regularly deals with aid readjustments on a small scale, but said he was unsure what would happen if, in a short period of time, a greater percentage of students were forced to turn to or increase their financial aid.

About two thirds of Macalester students receive some type of financial aid, Lindeman said, a number that will likely increase as parents’ incomes decrease with the economy.

“From a budgetary standpoint, if we see more people with financial changes, we could see a dramatic change. That’s a challenge that will bring more question marks.