With the start of the second quarter of Fiscal Year (FY) 2009, the University has only now begun to grasp the full impact of the economy’s recent downturn. The endowment declined by 3.9 percent for FY 2008—which spanned from July 1, 2007 to June 30, 2008—and the performance of the first quarter of FY 2009, which ended Sept. 30, was anything but positive.
“Our endowment, already down last fiscal year, has taken a hit in the first quarter of this one,” President Michael Roth wrote in an Oct. 15 entry on his blog, “Roth on Wesleyan.” “Although we fully expect the investments to recover over time, there will be a period of smaller returns from the endowment going to support the operating budget.”
As a result of the endowment’s disappointing first quarter performance, the University will be reevaluating its spending and investment policies beyond what was discussed at last month’s Board of Trustees Retreat.
While the University has maintained a diversified portfolio that includes investments in domestic equity, international equity, hedgefund strategies, private equity and venture capital, the economy’s volatile situation has contributed to a further decline in returns.
“What we have here is a macroeconomic crisis,” said Saul Carlin, vice president of the Wesleyan Student Assembly (WSA). “There’s a lack of faith in the market as a whole.”
As of May 2, 2008, the University owned shares of stock in 73 securities, including Armstrong World Industries, Ball Corp., Dell Inc., Raytheon Co., United Health Group Inc. and General Dynamics Corp., according to the University’s List of Securities.
Based on the Dow Jones Industrial Index, it comes as no surprise that the stock market’s fluctuating returns have been affecting the endowment. Armstrong World Industries closed yesterday at 22.39 points, after a 52-week high of 40.19 and a 52-week low of 21.50. United Health Group Inc. closed yesterday at 22.84 points—down 36.62 points from its 52-week high of 59.46.
The University is looking at how to both better structure its investments and further diversify its portfolio in light of the ongoing economic crisis. According to Carlin, the University has begun investing in currently distressed securities that are presently undervalued because of their low performance in the market.
“These investments are a good deal for us because over time they will fall more in line with their real value,” Carlin said.
While the University’s first quarter performance has made the economic crisis even more of a reality, the impact of one quarter may not be as severe as it seems.
According to John Meerts, vice president for Finance and Administration, the endowment spending formula works by looking at the last 12 quarters—or three years—and computing an average. The University then uses this average to determine the percentage—between 4.5 and 5.5 percent—that will be drawn from the endowment to contribute to the budget. However, this percentage to be taken from the endowment cannot exceed 6 percent. In this sense, he explains, the full impact of the endowment’s decline is postponed for several years.
“The impact lingers and gets worse depending on how fast the market and the endowment recovers,” Meerts said. “This year and even next [year] the impact is, at this point, still limited.”
In this sense, the impact of one quarter on the 12-quarter moving average will last with the University for three years. This impact, though, will only contribute slightly to the endowment’s picture as a whole.
Further budget cuts, however, remain a distinct reality for the University. Even prior to learning of the endowment’s performance for the first quarter of FY 2009, the Board of Trustees moved to postpone the construction of the $160 million Molecular and Life Sciences facility.
According to Carlin, since then, smaller cuts have been proposed, including a two-year drawback on the Residential Life budget, target reductions in academic departments, and the cutting of unfilled positions, which are often calculated into the University’s budget. The details of additional changes in the University’s budget, however, are still being finalized.
“We are working on [configuring the budget] as we speak and final decisions have not yet been made,” Meerts said.
While the campus community may not notice the full impact of the first quarter’s performance on the University for several years, Meerts noted the short-term reality of an unstable economy—a decline in the Wesleyan Annual Fund (WAF).
“Fundraising is another matter altogether and has a much more pronounced short-term effect [on the budget] because [the University] relies heavily on the Wesleyan Annual Fund,” Meerts said. “In addition, [the University] is trying to reduce its reliance on the Wesleyan Annual Fund and put more of its donations in the endowment.”
The extent of the economy’s impact on the University is far from realized, as schools can only guess when the fluctuating tide will settle.
“The situation remains highly volatile,” Roth wrote in e-mail to the campus community on Wednesday. “I don’t want to minimize the impact of the economic situation on Wesleyan.”