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Thursday, April 28, 2016

Endowments at UofL

Anyone at the University of Louisville who relies upon endowment funding received some very bad news earlier this month. University endowments declined about 17% in 2015.

While this is very bad news in the short term, it is actually part of a larger long-term problem.

At their peak, UofL endowments were worth $824 million on June 30, 2014. However, in a period covering more than a decade, University endowments are up only about 7% in total. This is not as good as the performance of in-state rival University of Kentucky, which has seen its endowments nearly double in that period. InsiderLouisville, which reported these facts, included this long-term chart in a March 2016 story:

Figures provided by the University of Louisville Foundation and the University of Kentucky

Given the recent hullabaloo over President Jim Ramsey's tenure at the university, I decided to investigate a bit further (especially given other recent controversies). After all, Ramsey is also the President of the University of Louisville Foundation, which is responsible for endowments. The Foundation outsources much of its money management, but is ultimately responsible for the outcomes. As its own webpage proclaims, "The Foundation is an independent 501(c)(3) not for profit corporation that holds, invests and designates funds of the University." Moreover:
The students, academic staff, schools, colleges and libraries of the University rely heavily on support generated from the endowments of the Foundation. These funds are invested and managed by the Foundation in support of the university’s education, research and service goals and used for scholarships, endowments, research chairs, grants and other academic initiatives. Gifts to the University are managed according to the wishes of the donor and the appropriate University departments. Gifts without restrictions are managed at the discretion of the Foundation Board upon recommendation of the president. 
Additionally,, the President often references his fundraising as a major success story at the University. In his recent public presentations (I saw these slides at a meeting with Arts and Sciences faculty and staff), the President notes that University of Louisville Foundation "private support" has grown from $35 million in FY 2002-03 to $154.7 million in FY 2015-16. 

Ramsey was hired at UofL on August 1, 2002, so this is essentially his tenure at UofL.

What about endowments during his entire tenure?

The endowment was worth $550 million on December 31, 2001, as revealed at the March 2002 Foundation Finance Committee meeting. Apparently, some UofL sources recently claimed that the value was only $221 million in 2002. At least one media outlet reported this number without checking the primary sources as I have here.

By the way, the endowment had grown an average of 14.7% annually for 5 years prior to Ramsey’s August 1, 2002 start date. This was reported to the Board of Trustees at their March 2002 meeting. Again, I'm linking to the primary sources from the University.

The endowment was worth $646 million on January 31, 2016. That means that during Ramsey's tenure as President of the University and the Foundation, the endowment has grown a total of $96 million, or about 17%. Annualized, the rate is about 1.25%.

Obviously, the growth would be a lot different if the baseline number was $221 million.

In any event, by comparison, the Dow Jones Industrial Average (DJIA) closed at 10021.57 on December 31, 2001. On December 31, 2015, the DJIA closed at 17,425.03, which means that it increased in value by about 73% during that time, or about 5.2% annually.

Readers with long memories may recall that fall 2001 was a tough time for the stock market. After the 9/11 terrorist attacks stock prices tumbled.

Indeed, because the value seemed low versus historic averages, my wife and I decided to invest about $5000 in the stock market that fall. However, we didn't really know anything and we didn't want to spend lots of money on a broker. We thought the future would involve more technology and knew that the NASDAQ hosted most tech stocks. Thus, we bought 150 shares of QQQ, which is an "exchange-traded fund (ETF) that gives investors and traders a snapshot of how some of the largest technology companies are trading stocks. The QQQ is heavily weighted toward large technology companies trading on the Nasdaq stock market, with over 50% allocated in the information technology sector."

We purchased 100 shares in October 2001 and 50 more a few months later in early 2002 (it was actually called QQQQ until 2011). The price was around $35 per share. For apples-to-apples purposes, the QQQ closed at $38.91 on December 31, 2001. On December 31, 2015, QQQ closed at 111.86. That means this NASDAQ-linked fund has almost tripled in value since the date we purchased it.

My only regret in hindsight is that we didn't invest more in QQQ.

Overall, both the Dow Jones Industrial Average and NASDAQ index funds have offered a lot of value in average returns during President Jim Ramsey's tenure at UofL. Yet, the Unviersity's money gurus have managed to dramatically underperform the market.

How does this align with Ramsey's claimed fundraising success? I offer three explanations.

First, it appears the baseline start number has been....er, mis-remembered.

Second, some of the fundraising has undoubtedly reflected one-time gifts that have been spent on specific projects. These are not endowed funds and are quite valuable to the University.

Third, as media outlets have reported, in recent down years, the University has been spending endowment assets to pay bills. "Asked about the drop in endowment value after the March board meeting of the U of L Foundation, Ramsey said they’ve been using Foundation assets to pay the bills and replace declining state appropriations, and expect increased donations and an improvement in the market to make up for what they’ve recently lost."

Let's hope this plan works out because the investment results have certainly not been great during Ramsey's tenure.


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