Endowment gains offset by increase in spending

Despite a national bear market, Princeton made a small profit on its endowment during the last fiscal year, University financial officials said yesterday. However, because of endowment spending for programs such as financial aid, the endowment lost $40 million.

During the last fiscal year, the endowment rose 2.2 percent, said Andrew Golden, the director of the Princeton Investment Company. At the end of June, the endowment stood at $8.3 billion, he said.

"We did a pretty good job making lemonade out of lemons," Golden said.

Each year the University spends about five percent of the endowment. In past years, the positive return has offset spending.

During the last fiscal year, Princeton's endowment outperformed Harvard and Yale universities' endowments. Harvard's endowment dropped $800 million to $17.5 billion because of a 0.5-percent loss on its investments which added to general endowment spending.

Since the beginning of July, Golden said the endowment has suffered losses and is down about 4 percent.

Between the end of June 2001 and the beginning of July 2002, the Dow Jones Industrial Average was down 17 percent. Golden attributed the endowments relative success to diversified assets and particularly strong investments in emerging markets, real estate securities and short selling stocks.

The endowment was underweighted in U.S. securities and benefited from increased investments in other areas, such as emerging markets, where the endowment returned 14 percent.

Though markets continue to fall, Vice President and Secretary Tom Wright '62 said there was "no sense of crisis at the moment" either for the University's endowment or for its annual spending.

"Princeton has the capacity to put its assets to work in ways that are explicitly intended to avoid overexposure to short-term events and to capitalize on long term trends," he said.

However, Provost Amy Gutmann said the University continues to anticipate annual deficits of between $2 million and $4 million on its $800 million annual budget during the next few years if spending is not adjusted.

The University's no-loan financial aid package is the primary cause for the annual deficits.

Get the best of the ‘Prince’ delivered straight to your inbox. Subscribe now »

"We could not have anticipated that in one year we would leap from a typical 42 to 44 percent of our students on aid to a freshman class with 50 percent on aid," Gutmann said. "That shift alone has an impact on the order of $1 million on scholarship aid costs, which will compound over the next three years if future admitted classes have a similar profile."

She said the University could control the projected annual deficits "without fundamentally altering" its budget priorities.

In the last Priorities Committee report, the University suggested two ways to balance the annual budgets. Either the moderate inflationary climate will allow the University to reduce the financial pool for faculty salaries while remaining competitive for hiring, or the University could defer less time-sensitive renovation projects.

"In today's economic climate, of course, there are many factors not within our control that could produce more severe disruptions in our budget planning," Gutmann said.

The University will make a formal report to the board of trustees next month, and Gutmann said no specific actions have been made to the budget plans.

Wright said if the University were to experience a long period of diminished returns, the ramifications would be felt slowly because the endowment is strategically invested to weather financial shocks.

International equity markets have particularly slowed down after corporate governance investigations into Enron, Worldcom and Global Crossing.

However, Golden said the endowment was able to turn a small profit on stocks like Enron by short selling — making a profit on stocks when they drop. He said there were many opportunities to sell stocks short in last year's market.

Larry Goldstein, a senior research at the National Association of College Business Officers, said that institutions that make a profit this year "will so much be the exception."

"It's not impossible," he said, "but generally the endowments that are doing well have not done well in past years."