An explanation of Macalester’s Endowment from the SERC

In our recent survey to the student body, 84 percent of students self-rated their understanding of our endowment as poor to very poor and over 90 percent indicated that they wanted to learn more. The nuances of an endowment are illegible to most, because the specific mechanisms for accruing profit from our endowment are incredibly technical. The purpose of this article is to provide the Macalester community an understandable snapshot into the management and execution of our endowment in response to student desire to know more. We hope this information will contribute to improved engagement between students and the administration.

Macalester, like any private college, relies on a complex network of funding sources to operate including tuition, direct alumni support and strategic investment of the endowment. According to the Investment Office, the market value of Macalester’s endowment is $634* million, putting Macalester above the average for similar sized academic institutions. The conventional purpose of an academic institution’s endowment is to provide a consistent level of financial support to the operating budget. For example, recent figures from the Investment Office show that 34.6 percent* of the college’s budget is supported directly by money made from the endowment.

The Macalester endowment is a long-term investment fund made up almost entirely of private gifts made to the College over the past 100+ years. The income from the endowment supports financial aid, academic programs, salaries for faculty and staff and other expenses within the operating budget. Approximately 72 percent* of incoming students receive need-based financial aid at Macalester, which is higher than most of our peer institutions. This means that Macalester is more dependent on the endowment than most schools and the success of our investments is a big reason why Macalester can offer so much financial aid.

In 1975, Macalester’s endowment had a market value of only $17 million. After the creation of the Wallace Fund in 1981 by the donation of 515,000 shares of Readers’ Digest (RDA) common stock, our endowment reached near its current state as shown in the nearby figure. In most donation situations, an endowment may be required to be spent in a certain way. This means if a donor gives towards a specific purpose, for example an endowed professorship, the college is legally prevented from using those funds for other purposes.

In order to offer consistent support to the College’s operating budget, Macalester’s endowment is invested in a conservative, long-term and market neutral strategy to generate stable returns over time. This is accomplished by holding a combination of different asset classes that perform differently under different market conditions that work together to hedge various forms of risk (recession, inflation, etc.) and increase real returns in the long term. The different holdings include:

  • Directly owned public equity – stocks that Macalester’s investment office selects and manages itself

  • Bonds: debt securities that pays interest at lower risk and return

  • Mutual funds: professionally managed collective investment vehicles that pool money from multiple investors to purchase various securities

  • Hedge funds: similar to mutual funds, but are characterized by more diversity in strategy that offers exposure to a broader range of markets and financial instruments, typically less liquid and less transparent

  • Private equity funds: professionally managed collective investment vehicles that invest in the equity of non-publicly traded companies targeted as an arbitrage opportunity (restructuring, new product financing, venture capital, etc.); that is, a private equity firm might purchase “Shish,” cut costs and develop a new marketing strategy to grow revenues (generally increase its value) and then sell it for profit

  • Real assets: direct investments in real estate, timber, and oil/gas

The majority of these asset classes are managed by a suite of outside private investment professionals the Investment Office hires to administer specific portions of the endowment. Our outsourcing of this management keeps our cost of operation much lower than similar institutions by holding staff levels low. Each manager has a unique investment strategy which they are committed to and manage money from other investors alongside Macalester’s funds. The amount of money each manager invests varies, but most manage around 3%* (or $19 million) of the total endowment. These managers are selected based on their previous performance and investment strategies by Macalester’s Investment Office.

The key things to remember are that diversification works by choosing a strategic mixture of investments that respond to economic changes in different ways. As a result, when thinking about changes to individual investments we must consider both the individual investments on their own and the role they play in the endowment as a whole. In addition, many of our investments are pooled with the funds from other investors in what are called ‘commingled funds’. Since the managers of commingled funds invest on behalf of a large number of clients, we cannot dictate investment policies to these managers. Finally, many of our investments are bound contractually for extended time periods (up to 15 years) implying there are very discrete and temporary windows when we can easily change investments.

In summary, the Macalester College’s endowment is a mechanism to support the mission and sustainability of the institution. If you would like to learn more details regarding Macalester’s endowment and its management, please come to the Student Endowment Responsibility Committee’s (SERC) information session next Thursday, April 25th at noon in the Harmon Room or email SERC at [email protected] Rumor has it there will be food.

*As of October 10, 2011