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By Matt Lindsay

To many, $1 billion may seem an outlandish amount of money. But in the realm of university endowments, that benchmark is becoming the status quo. At the end of the 2005 fiscal year, five universities possessed endowments of more than $10 billion: Harvard University, $25.5 billion; Yale University, $15.2 billion; Stanford University, $12.2 billion; University of Texas, $11.6 billion; and Princeton University, $11.2 billion. Harvard and Princeton eclipsed the $1 billion endowment threshold more than two decades ago.

As of June 30, GW’s endowment stood at $962.6 million. The most recent National Association of College and University Business Officers endowment survey, released in January, placed GW’s endowment as the nation’s 69th largest, between the University of Florida and Syracuse University. Good company, but not among the endowed elite. That same survey found 56 schools with endowments of more than $1 billion, including several liberal arts colleges with less than 2,000 students, such as Amherst College and Swarthmore College. Obviously, more money means more opportunities, but what do these endowment figures mean in practical terms?

When Stephen Joel Trachtenberg became GW’s 15th president in 1988, the endowment was valued at about $200 million—its current, nearly billion-dollar standing reflects increased fundraising and wise management. At GW’s leadership retreat in June, Trachtenberg articulated the importance of the endowment to the University’s future operations, stating, “If we are going to prosper academically, we must rely less on tuition—there is no choice, as I think I’ve made clear—and more on endowment. Only a firm financial foundation will allow the University to remain flexible and first-rate.”

In the last three years, the University’s endowment experienced tremendous growth, expanding from about $630 million to nearly $1 billion, under the leadership of Trachtenberg, Board of Trustees Chair Charles T. Manatt, Board of Trustees Investment Committee Chair Russ Ramsey, Executive Vice President and Treasurer Louis Katz, Vice President forAdvancement Laurel Price Jones, and Chief Investment Officer Don Lindsey. Those who oversee the endowment are now charged with the task of taking it beyond the billion-dollar benchmark and keeping it competitive.

Dissecting the Endowment

GW’s endowment is a pool of more than 900 individual endowments, each of which provides perpetual financial support for a designated purpose. The endowment sustains professorships, scholarships, fellowships, research activities, University operations, and a student investment fund (see following story).

Annual endowment payouts provide universities with budget support and offset expenses. While payouts differ, the average university uses about 5 percent of its endowment annually. Thus, hypothetical “University A” with a $1-billion endowment will put $50 million in endowment funds toward its annual operations, while hypothetical “University B” with a $100-million endowment will have $5 million annually for its operations—disparity in endowment size can affect the resources and services universities offer.

GW does not have a fixed-percentage payout rate; it uses a complex formula to calculate a payout rate per unit of the consolidated endowment. The total payout from GW’s endowment to the University was more than $36.1 million in 2005. This payout freed up other funds to support endeavors including academics and student life.

To Ramsey, BBA ’81, CEO and CIO of Ramsey Asset Management, “The endowment is your nest egg; it serves as a safety net for the University.” Some analysts believe universities are hoarding money in that nest egg, essentially shortchanging current students. Ramsey and Lindsey disagree.

“If we spend more than 5 percent, we would seriously run the risk of eroding and eating into principal, which means that we’re benefiting the present constituency at the expense of future generations,” Lindsey says. “And if we don’t spend anything, certainly that’s going to help people down the road, but it means GW can’t meet its ongoing mission. It’s a very difficult balance, but one that we constantly think about and relate back to as we make investment decisions.”

In basic terms, endowment managers aim to earn an annual rate of return equal to what a university spends out of its endowment, plus the ongoing inflation rate. GW spends about 5 percent annually and estimates inflation to be 3 percent, thus the required rate of return is 8 percent.

“If we can make over that 8 percent, then we’re able to grow the purchasing power of the endowment, meaning we can provide at least as much for future generations as we provide today,” Lindsey says. “But hopefully we will be able to provide more for future generations than we can provide today, by continuing to grow above that long-term expected rate of return. That doesn’t mean you do it year-in and year-out. Some years there can be a 20 percent return and some years there may be a zero percent return. But if you can try to limit the downside and on average generate a 10 to 12 percent return, then that’s going to meet the objective.”

While rate of return goals are consistent across universities, organizational structure is not. Universities with smaller endowments often outsource management. The largest endowments can afford more employees—Yale has a professional staff of 20—and several elite universities have formed wholly owned subsidiaries to manage their endowments, namely Harvard Management Company.

GW has three professionals, including Lindsey, dedicated to investment analysis and portfolio management. The main thrusts of this work are research—reviewing industry fundamentals, growth prospects, government regulation, and the like—and identifying, meeting with, and selecting money managers. GW employs 35 money managers to invest the University’s endowment funds. Although GW’s Investment Office exercises significant control over the University’s endowment assets, that responsibility previously lay elsewhere.

Investment by Committee

It has been a tumultuous decade for the endowment. Prior to 1996, endowment management, except for real estate, was outsourced. That year, the Board of Trustees Investment Committee assumed control, administering the endowment for the next seven years, during which its market value expanded from around $500 million to more than $630 million. However, growth lagged behind the average achievement of 41 “peer” universities and seven “market basket” schools that GW considers direct competitors: Boston University, Duke University, New York University, Northwestern University, Tulane University, University of Pennsylvania, and Vanderbilt University.

The years between 1996 and 2003 were turbulent times for university endowments, and the market as a whole. The bull market of the late 1990s, where massive gains could be realized, gave way to the downturn of 2001 and 2002, where positive returns were rare. As the size of GW’s endowment fluctuated, it became clear that a dedicated, full-time staff was needed to recommend allocation targets, conduct research, interview money managers, and provide day-to-day oversight of the endowment.

A New Approach

In April 2003, Lindsey joined GW as chief investment officer, tasked with creating an internal endowment management operation at the University. Lindsey brought 16 years of experience, including stints at the University of Virginia, and as president and CEO of the University of Toronto Asset Management Corporation, where he managed the wealthiest Canadian university endowment.

At GW, Lindsey initially focused on retooling the endowment’s asset allocation. He recognized the need to change asset weights and to diversify into additional asset classes to produce more stable and predictable returns. This meant reducing real estate holdings and the reliance on traditional asset classes, such as U.S. stocks, bonds, and cash, while expanding into new asset classes such as private equity, commodities, and hedge funds. Lindsey says that if assets are correctly balanced, this diversification strategy can reduce risk.

“I certainly believe in putting fairly high-risk strategies into the portfolio. But the important caveat here is you don’t look at risk in a portfolio on a stand-alone basis. The real art is combining risky strategies together so that you can reduce the overall risk because the strategies are not correlated to each other, they balance each other,” Lindsey says.

Lindsey also overhauled the University’s investment process. The new approach mirrors the target asset allocation, with a renewed focus on research, due diligence, and investment monitoring. Lindsey says the new investment process establishes a unique approach to endowment management.

“We start the process with looking at major global themes and where we think the growth opportunities will be over the next five to 10 years. It is really a top-down approach that leads us to have a view about different areas of the economy where we see growth opportunities,” Lindsey explains. “Once we identify those areas and find a way to invest in that concept, then we go look for managers to implement that. We think this is an attractive approach going forward because, unlike in the ’80s and ’90s where we were in a very strong equity bull market and all you had to do was own the S&P 500 Index, today it is much more difficult to find growth opportunities.”

Energy, infrastructure, and international assets are areas that Lindsey and his team identified as being underinvested in recent times, but where one can expect significant global growth in the coming years.

Additionally, Lindsey emphasizes the need for the University to stabilize the annual endowment payout. In recent years, GW’s spending as a percentage of endowment has been closer to that important 5 percent figure, in line with peer institutions.

Lindsey also promotes the openness of endowment operations and dialogue with current and potential donors; as vice president for advancement, Price Jones appreciates Lindsey’s efforts toward transparency. “Wise and transparent management of an endowment leads people to make gifts to a university,” Price Jones says. “It is a hindrance if the endowment is not well managed and if people are in doubt about how it is being managed.”

The Proof is in the Performance

In the last few years, the endowment management approach implemented by University leaders has produced impressive results. The total value of the endowment has grown by nearly $400 million. In the three-year period leading up to June 30, 2006, the GW endowment generated a net annual return of 18.3 percent, significantly outperforming the composite benchmark three-year net annual return of 11.6 percent. During the 2006 fiscal year alone the market value of GW’s endowment ballooned 17 percent, from $823.1 million to $962.6 million.

Lindsey, Ramsey, and Price Jones see beyond the tangible monetary benefits associated with the endowment’s growth to the intangible advantages, such as positive publicity and more opportunity to inspire donor confidence. “When people make the biggest gifts they have ever made, they view them as investments,” Price Jones says. “Donors are putting their money to use at the University, and they want to know they are investing in a place that will manage their money well and support those enterprises to which they gave the money.”

Yet, for all the recent success, there is more that needs to be accomplished.

Phil & Jim Bliss/

Opportunity, Cost

The same NACUBO survey that ranked GW 69th in the nation in terms of endowment market value places the University number 228 among private institutions in terms of endowment assets per full-time equivalent student. At the end of the 2005 fiscal year, GW’s endowment per FTE student stood at $42,091, far less than the $1 million-plus sported by Harvard, Princeton, and Yale. The value of a university’s endowment per student is reflected throughout an institution, in diverse areas such as tuition, financial aid, academic research and programming, and faculty salaries. Larger endowments per FTE at peer institutions allow these universities to create unique advantages, such as waiving tuition for students from low-income families.

“Endowment per FTE is an important measure because it determines how much money an institution is able to allocate per student that attends,” explains Damon J. Manetta, manager of public affairs with NACUBO. “Just because an endowment has a great deal of money behind it does not mean it has the same buying power.”

GW trails almost all of its market basket competitors in endowment funds per student. Of the seven universities previously mentioned—BU, Duke, NYU, Northwestern, Tulane, UPenn, and Vanderbilt—GW bests only BU’s endowment per FTE. Schools such as Duke, Northwestern, Vanderbilt, and UPenn boast an endowment per FTE that is five times larger than that of GW. Lindsey estimates that to be on the same level as its peers, GW would currently need an endowment valued at $2.5 billion.

Furthermore, GW is not growing at the same rate as its peers. While the University’s endowment per FTE student has increased by approximately 50 percent in the past decade, the average endowment per FTE student growth rate among peer schools was nearly 150 percent.

“An endowment’s size is important relative to the number of students it is supporting and to the amount that a university needs to take out annually,” Ramsey says. “If you look at GW versus virtually any of our peers, our endowment per student is near the bottom. Alumni need to understand that this endowment is substantially undersized in terms of needs of the school.”

Another way to quantify an endowment’s contribution is to measure the percentage of a university’s operating budget financed by endowment funds. In 2005, GW’s endowment provided $36.1 million toward University operating expenses, about 6 percent. In comparison, in 2005, Yale’s endowment provided $565 million to the university, about one-third of its operating budget, and Stanford’s endowment contributed $452 million, approximately 17 percent of its operating revenue. A more direct competitor, Vanderbilt University, obtains about 14 percent of its annual operating budget from the university endowment, more than double the funding provided by GW’s endowment.

Although the GW endowment has grown by leaps and bounds, it still has some ground to make up to stay in step with peer institutions.

The $1-BillionThreshold and Future Growth

If recent growth trends continue, GW’s endowment will cross the $1-billion threshold this academic year. While this is largely a symbolic milestone, it is significant. After all, it was only a decade ago that the University’s endowment crossed the half-billion dollar mark.

In 2004, a 5 percent payout from the endowment provided the University budget with $34.3 million. The 5 percent payout budgeted for fiscal year 2007 will provide more than $46.3 million toward GW operations, $12 million more than just three years prior.

“The good news is the endowment is at critical mass. We have a tremendous track record and a tremendous chief investment officer,” Ramsey says. “However, we have to watch carefully the amount of the endowment that goes into operations and realize that the rate of return will likely be lower in the future. We can’t commit ourselves to spending future dollars that may not be there.”

“Managing an endowment is a delicate balance between providing financial resources for the present and for the future,” Lindsey explains. “That means we have to have in mind not only preservation of capital so the current constituency, being the students and the faculty, have resources, but we also have to think about the fact that the school has been around since 1821 and it’s going to be around for another 100 or 200 years more. It’s hard to think that far in advance, but we really have to think about the endowment as being in perpetuity.”

Enhancing the Endowment

Endowment growth in the past decade has been driven primarily by investment performance. Gifts accounted for about 14 percent of GW’s endowment growth between 1995 and 2004, but over the same time frame, gifts made up roughly 50 percent, on average, of the endowment growth at BU, Duke, NYU, Northwestern, Tulane, UPenn, and Vanderbilt. Investment performance can only do so much—gifts serve as the catalyst to rapidly vault a university ahead of its competitors and into the upper echelons.

In each of the past four years, GW has seen somewhere around $13 to $15 million in annual gifts to the endowment. Price Jones says she would like to obtain more endowment gifts for the University, although oftentimes donors can see a more immediate impact through other types of giving. Price Jones says that, in the long term, no other type of gift is as effective at championing a specific cause as an endowment, because “an endowed fund lasts forever.”

“I believe we are rapidly approaching a world-class investment operation that will help us grow endowment at the best rate that we can,” asserts Ramsey. But he agreed with Lindsey and Price Jones that future endowment growth relies heavily on both gifts and investment returns: “The school must dramatically increase the amount of money that goes into the endowment.”

More than a year ago, Associated Press higher education writer Justin Pope opined, “The $10-billion endowment soon may be the new $1-billion endowment—and $1 billion a mark of mere mediocrity, not excellence.”

The managers of GW’s endowment are keeping that prediction in mind as they move forward, refusing to accept mediocrity and striving for excellence.

Ramsey Student Investment Fund Yields Impressive Returns

The Ramsey Student Investment Fund is managed in part in the Capital Markets Room in the new Ric and Dawn Duqués Hall.

Julie Woodford

One of GW’s most unique gifts came in 2005, when Russ Ramsey, BBA ’81, and his wife, Norma, gave $1 million to the University endowment to establish the Ramsey Student Investment Fund. This investment portfolio is managed by GW MBA students in the Applied Portfolio Management course, with insights and guidance provided by professors Don Lindsey, GW’s chief investment officer, and Ethan McAfee, director of research at Ramsey Asset Management.

Students are divided into teams that research stocks in five different sectors. Each student is assigned two portfolio stocks within his or her sector to research and analyze. After this background work, the student issues a hold or sell recommendation for each stock. Equities are added to the portfolio from the pool of companies that students propose as buy recommendations, based on additional research in his or her sector. While each student must issue a hold or sell recommendation on two companies and identify two companies as buy recommendations, the class as a whole votes on how to proceed on each stock, with majority opinion ruling.

“We are hoping to teach real-world skills, i.e. investing in the stock market and doing it successfully,” Ramsey explains. “The goal is to start a culture of attracting high-energy and motivated financial students who want to learn the capital markets and money management business.”

The class provides a more realistic environment because the students are dealing with real money, which brings more pressure to perform. “The pressure was high because you feel personally responsible in front of everyone in the class,” says Mira Spassova, MBA ’06, a student in the Applied Portfolio Management course. “It is embarrassing when you have not done your homework and researched the company from A to Z.”

The portfolio management course “keeps us at the forefront of finance education,” Lindsey says. “This is a way for us to put the students in a situation that’s designed to be as close to an investment management operation as possible. And certainly having real money is the element that does it for us.”

While the overall performance of the student investment fund is important, of equal significance is educating students about the structure and procedures of an investment management operation.

In the first year of its operation, the Ramsey Student Investment Fund certainly did score. Since its inception in May 2005, the fund produced a 17.1 percent rate of return, almost five percentage points above the rate of return of the S&P 500. In only 14 months, the assets in the fund grew from $1 million to $1.2 million.

Lindsey believes the course creates a process that is educational and which can perform well in practice. In the future, he hopes students will be exposed to a wider variety of investment vehicles as the fund expands into more asset classes; more complex strategies, including derivatives; and international markets.

“Even though it takes many years of practice to develop portfolio management skills, these students are being introduced to that practical element in a way where they feel challenged because there are real dollars at risk,” Lindsey says. “The overall objective is to contribute to the success of business education. We’re just one component in trying to continue to move the MBA program forward.”

—Matt Lindsay