$8.5 billion: Raising and spending the Princeton endowment

It may have started small, but now it's a full grown tiger. Beginning as a £185 pledge from a group of College of New Jersey students in 1745, the Princeton University endowment hit the $8.5 billion mark at the end of last year.

At approximately $1.3 million per student, Princeton has the largest per-student endowment in the country and stands behind only Harvard, the University of Texas and Yale in total endowment size. Over the last 20 years alone, the endowment increased 12-fold, with the largest single-year increase occurring in 2000.

But other than knowledge of these impressive numbers, most students are unfamiliar with the function of the endowment. The fund pays for many University programs. Faculty support — such as endowed departmental positions — financial aid, library books, athletics and various discretionary funds are all made possible through the endowment.

In what amounts to a legal contract, endowment donors select how their money is used.

"We try to put in language that allows changes as needs change over time," explained University Vice President Richard Spies GS '72. "The gift is intended to be in perpetuity. What one might specify today might not be relevant in the future. For example, if we had a gift to support geography, we would be hard-pressed to find a use for it now."

While there is no minimum endowment gift, donations generally amount to $25,000 or more. "Given the fact that we have to preserve the principle and that we have to reinvest so that the principle grows over time, we end up spending about four percent of the value per year," Spies said. "If you give $25,000, that produces about $1,000 in the first year for whatever purpose it's been established."

With these calculations, $3 million funds an endowed professorship and half a million endows a fellowship or scholarship.

Most contributions are from alumni and parents of current and former students, with additional support from community and advisory committee members.

The recent tremendous growth in the endowment is a result of both donations and strategic investment. The University uses the services of the Princeton University Investment Company — which employs a director and investment analysts and has its own 12-member board — to manage its portfolio.

According to Princo director Andrew Golden, the company's goal is to "always seek high returns so that we can continue to provide substantial flows to the operating budget."

Though endowment growth has been steady — it hasn't had a negative-growth year in a while — last year it grew by a remarkable $2 billion, or 35 percent.

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The current year is less eye-catching, but Golden finds it satisfying.

"Considering that the U.S. stock market has lost 15 percent over the past eight months and we are up several percentage points, we're doing something right."

In 1990, Princo changed its strategy from a purely domestic-based equity focus to a more diversified strategy. The directors and trustees at the time believed that the switch would be beneficial to the University in the short term, but Golden noted, "Our thinking has evolved so that we recognize that a lot of those strategies really have a place in our portfolio. Regardless of what the market does, they just make so much sense. Markets tend to reward people for doing uncomfortable things."

Aligned with the long-term plan of a multi-asset multi-strategy diversified approach, 85 percent of the fund is equity based — spread among domestic and international stocks, hedge funds, private industrial investments and real assets such as real estate and timber. The remaining 15 percent is invested in fixed income securities. This approach "reduces our risk and broadens our opportunities," Golden said. "The only thing it sacrifices is the ability to keep up with one particular market if that one particular market is going through the roof. That was the story during much of the late 90s."

Golden recognized the 80s and 90s were "extraordinary times" that probably won't be repeated. In light of the recent downturn in the markets, Golden said he has made some changes to the portfolio. "We try to have reasonably healthy respect for the markets," he noted. "We entered this most recent downtown with as little exposure to the US stock market as we can tolerate, much less than our long-term plan would call for."

University students will benefit from Golden's success next year, as the annual endowment spending has been increased as a result of continued strong returns. The $215 million that the endowment contributed to the current year budget was scheduled to be increased to $226 million next year. A decision by the Board of Trustees in January, however, will mean another $57 million, increasing endowment spending to $283 million.

The endowment had grown quite generously the past three years, outpacing the five percent increase in endowment spending the University allots for each year. While the endowment earned a 35 percent return last year, only four percent could be spent and the other 31 percent had to be reinvested. "Because of that problem," Spies said, "which is the best kind of problem to have, the spending rate had fallen below where we want it to be. It fell to 3.25 percent when it should normally be between four and five percent." This decision raises the spending rate up above four percent.

Spies expects recent decisions — such as the provision of grants instead of loans for undergraduates — to be permanent. "We carefully considered the fact that returns might go down and we can never say never when trying to plan something for perpetuity," he said. "With a high level of confidence, though, I can say that these programs will continue for a long time."

Spies said he believes that the endowment plays a tremendous role in providing undergraduates a first-rate education and faculty members great research facilities.

The size of the endowment can also impact Princeton's standing among other universities. "It puts pressure on other universities because we do have these resources," Spies said. "We've told alumni and other donors, current, past, and hopefully future, that we'll use what they've given us aggressively and effectively and not be held back. If we think there is something really important to be gained we'll spend the money."

"Some people ask, 'Why should we give to Princeton? Princeton has enough money.'" he said. "We reply that it's an investment in quality. Our success in making this argument determines how much we have to spend."