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Investments serve to increase University funds

To the tune of "Under the Sea," the Nassoons recently sang the following in Richardson Auditorium to the amusement of students and alumni: No need to pay the 30 grand When you've got fiscal sleight of hand No need for dollar When you're a scholar Princeton is free.

If only this were true.

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A $30,000-per-year education certainly generates a significant portion of the University's operating budget. Compared to public universities and other research-oriented private universities, a Princeton education demands a higher financial sacrifice per student.

Still, the rate of increase of University tuition and fees, which is based on family income rather than inflation, has declined consistently from 6.7 percent in the 1990-91 academic year to 3.9 percent in 1997-98. Additionally, the University's need-blind admissions policy allows students to receive as much financial aid as they demonstrate need for.

In the 1996-97 operating budget, student fees ? both graduate and undergraduate ? produced more than $133 million in revenue, according to a Jan. 15, 1997, Priorities Committee report to President Shapiro.

A comparable amount was provided by government grants ? more than $165 million ? and investment income ? more than $138 million, according to the report. The full University budget was over $500 million.

The annual budget pales in comparison with the University's endowment, which surpassed the $4 billion mark last year, making it the fourth-largest in the nation behind Harvard and Yale universities and the University of Texas.

Funding

The endowment is primarily funded by gifts from alumni and philanthropic foundations, and investment income from the endowment accounted for 30 percent of the budget last year. In comparison, the investment income from Harvard's and Yale's endowments provided for 21 and 15 percent of their budgets, respectively.

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Allan Demaree '58, a former executive editor of Fortune magazine, wrote an in-depth article on the University's investments in the Feb. 21, 1996, issue of the Princeton Alumni Weekly. He said the income from University investments provides a significant part of the expense of each student's education.

"Even though the money you spend on tuition, room and board and such is a lot compared to other institutions, the endowment produces enough money to basically allow a subsidized education for all students," he said.

A $4.5 billion endowment is an investor's dream since a large amount of capital is available for a diverse portfolio, which allows for a large profit for each percentage increase.

On the other hand, the endowment is small enough ? compared to General Motors' $55 billion corporate pension plan ? to relieve some of the investor's stress of looking for huge investments with "outsize returns" that are generally hard to come by.

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"Princeton's endowment is big enough to underwrite the quest for ideals, but small enough that investing in those ideals will make a difference," Demaree wrote in his article. "Call it the Goldilocks factor ? not too big, not too small, but just right."

In order to handle investment decisions, the University created the Princeton University Investment Company (PRINCO) in 1987. At that time, the investment portfolio totalled about $2 billion.

PRINCO president Andrew Golden said the company aims "to generate a high enough return to fulfill the mission of the University." In order to do this, he said the investment company "needs to be aggressive and capitalize on important opportunities."

The investment company is an independent entity that invests money solely for the University. Though the Board of Trustees ? particularly through its finance committee ? ultimately oversees the University's finances, PRINCO manages its own day-to-day operations with little outside input.

According to the trustees' bylaws, the PRINCO directors have the power to make all University investment decisions, including in which stocks and securities to invest. The directors can also invest in venture capital as well as second-tier financing ? investing in large companies that have not yet become corporations.

Provost Jeremiah Ostriker, who makes budget recommendations to the finance committee and President Shapiro, said the return from PRINCO is a significant part of the budget. He said the strength of the budget ultimately "depends on how well PRINCO does and how much money is available."

Ostriker likened the endowment to a mutual fund in which the University administration and the various departments and services own shares. For example, the library owns a number of shares to purchase books and the academic departments own shares to fund a professors' research.

Each "share" pays a dividend, determined by the trustees and based ultimately upon the rate of return on University investments. Last year's rate of return was 19.3 percent, well above the national average of 17.2 percent, according to the annual report of the National Association of College and University Business Officers.

In order to judge the endowment's performance, the University compares itself with a "benchmark" portfolio of 65 percent U.S. equities ? the Standard & Poor's 500 stock index ? and 35 percent U.S. bonds ?the Lehman Brothers Government/ Corporate Bond Index. Out of the last 20 years, the endowment has beaten the benchmark 12 times.

For example, one dollar invested by PRINCO in 1977 would currently be worth $17.28, while a dollar similarly invested in the benchmark portfolio would be worth only $13.79. (See graph)

Breakdown

Though he was unable to provide a detailed list of University investments, Golden said PRINCO invests 20 percent of the endowment in domestic stocks, 15 percent in international stocks, 25 percent in hedge funds ? both domestic and international ? 25 percent in non-marketable income and 15 percent in fixed-income bonds.

A manager is assigned to each of these areas, and each develops a highly diversified portfolio. Golden said there is a "strong bias toward equities. . . . History has proven that you will get high returns." This differs from most U.S. institutions, which put the bulk of their investments into stocks, he said.

Public attention has recently focused on the nature of university funding, especially investments within the tobacco industry.

Richard Winn, financial vice president at Haverford College, told The Daily Princetonian last fall that Haverford had sold off tobacco stocks with health concerns in mind. Controversy erupted at Yale last month over the same issue.

The University has not divested its tobacco investments, and Golden said investment decisions are not made within "the framework of a social agenda."

There are currently no restrictions on what the University is permitted to invest in, Golden told the 'Prince' last year.

He noted that "to stop investing in something not purely for economic reasons requires a trustee-level decision. . . . We need trustee interpretations to define extraordinary cases."

For example, the trustees recommended a curtailment of investment in South Africa during the 1980s.

The trustees have not brought the issue of tobacco investments to the forefront of discussion thus far.

President Shapiro said he is impressed with PRINCO's work over the last 10 years. "The results speak for themselves," he said.

"As I look at the current activities of PRINCO, I see two things. I'm not an expert in these matters. . . but the basic overall policy seems right to me, as well as its implementation. PRINCO has served the University well," Shapiro added.

In addition to PRINCO, Nassau Capital controls a portion of the University's investments. Led by Randall Hack '69, the group manages 25 percent of the portfolio invested in non-marketable assets.

The University's shares of non-marketable assets are generally larger than private shares. Some of these assets are mature, such as corporate buyouts, while others are relatively young, such as venture capital.

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