The Bates Student - September 25, 1998


No longer a joke, the college's endowment explained

Staff Writer

LANE HALL - What exactly is the endowment? You hear about it fairly often. You hear that it is not big enough, that it is holding Bates down in the rankings, etc. But it is always discussed in vague terms as, depending on who you ask, some gigantic, or not so gigantic, sum of money existing somewhere, controlled by someone, for some reason that has to do with the running of the college.

The endowment is the major financial resource of the college, comprised of the school's assets held in perpetuity. In other words, it is the chunk of money, invested by Bates over an undefined period of time, which is used to cover the college's operating budget.

The base of the endowment is created through gifts. Therefore, the largest factor to the growth of the endowment is the size of the new gifts put into it. Tuition goes directly toward operational costs and does not affect the endowment except for the fact that operational costs not covered by tuition are taken out of the endowment.

Bates invests for the long term, under the assumption that Bates as an institution will have no end. The College looks to invest their money in assets as either stocks or bonds which will bring a high total return over the undefined period of time. The breakdown is roughly seventy five percent invested in stocks and twenty five percent invested in bonds.

Bates will spend and reinvest the total return (the interest, dividends, and gains or loses of the endowment ). The idea is that the nest egg will continue to grow and provide for the financial needs of the college.

The equation, for those of you with an interest in the jargon filled world of finance, basically goes like this: the college examines the total return of the sum of all the portfolios (the more portfolios Bates has the more diversified those portfolios are the less likely the endowment will be seriously affected by short term market fluctuation over the long term) against the cost of managing the endowment, inflation, and the amount of money which needs to be spent on running the college.

Ideally, there will be some percentage of the total return left over (called the real reinvestment) which can be reinvested in new stocks, funds, or increased institutional spending.

The portfolios are designed to have a modest real reinvestment return, but most importantly, maintain the real value of the portfolio. To do this the portfolio must make enough of a total return to cover inflation. Inflation is generally held to be between three and four percent so in order for a portfolio to be viable it must account for inflation after taking into account institutional spending and operational costs. The period in which this equation is measured runs the entire length of a market cycle, from beginning of a bull market till the end of the next bear market.

Bates College uses an investment consulting firm based in Waltham, Massachusetts as well as money managers both at home and abroad to manage the money, decide which funds and companies to invest in, which bonds to purchase, the logistical management of the portfolios, and the monitoring of the funds performance. The College maintains an Investment Committee, an extension of the Board of Trustees, which reviews the work of the consulting firms.

Vice President Peter Fackler reports that over the last four years, the market has experienced outsized gains. Fackler stressed the importance of not looking at the endowment in short term because it is such a long term investment. For example during last months fall in the stock market the value of the endowment changed thirteen percent. However the year before the endowment had been up eighteen percent.

Bates does not have a list of companies it will not invest in. This raises questions of supporting both companies and nations with a history of labor, environmental, and human rights violations.

The school does have a Social Investing Policy, which in theory provides a mechanism for checking into companies with questionable ethical practices. The policy is not proactive, but merely allows for a subcommittee of the Investment Committee to convene if information is brought to its attention which questions the practices of a particular holding.

In order for a review to be started someone, say a student, presents sufficient evidence that a company's behavior does not conform to the college's mission, culture, or vision. Until such evidence is brought forth the College acts under the "operative assumption." This assumes that all of its money is invested in socially responsible companies and allows the management firms to decide where the money goes.

According to the "Policy on Socially Responsible Investing" presented to the Board of Trustees in May of 1997, the College desires the investment policies and choices of funds to be consistent and socially responsible but it is apparently not important enough to warrant a preview of the companies it invests in.

In explanation of the policy, Fackler expressed doubt that it was logistically possible, "to set up a structure to look at every company in the world and make judgements." Fackler made several valid points concerning the difficulty of making opinions concerning just what is socially acceptable. At some point the business practices of all the companies in which Bates might invest should be reviewed.

The size of an endowment is the sum of the new gifts into it and the total return minus the costs of running the investment program and the amount that has been spent on college operations. It is difficult to ascertain why one college's endowment is greater or less than a similar institution. Fackler used the example of Harvard and Yale, why is Harvard's a whopping 12 billion dollars while Yale's is "only" 8 billion?

Bates College's endowment is 140 million dollars. This places it around number twenty-six out of the top twenty-nine liberal arts colleges in the country.

Grinnel is number one with 755 million.

That does not necessarily speak to how wisely Bates handles its endowment, but it is a reflection of the institutions history and the success of prior giving campaigns.

Real growth in the endowment comes from new gifts. It also depends on the size of a graduating class or classes. Bates, for example, increased the size of its classes during the 1970's which in a financial sense is relatively recent.

Older institutions such as Williams and Amherst have had more established giving patterns and a longer period in which the endowment was being invested.

Another factor has a great deal to do with what profession graduates enter into. Lawyers, doctors, and business people are more likely to be able to give larger gifts than teachers, or other public servants.

The most important thing to keep in mind when comparing endowments is that the difference between schools is more a function of history than the school's policies of today. According to the Office of Institutional Research, Bates's Endowment has shown considerable growth over the past ten years but that in terms of many of the top liberal arts colleges we are still playing catch up.

According to Jim Fergersen of the Office of Institutional Research, endowment size is becoming less important in determining rank in polls such as U.S. News & World Report. The magazine has received a fair amount of flack for the weight it placed on endowment size and, at least in the latest poll, has shifted the financial input to examine other factors more heavily.

Projects such as the construction of the new academic building and the library renovations are not funded out of endowment returns. The new building, which has a price tag of 18 million dollars, was funded by a campaign drive specifically earmarked for the building as well as a bond issue made last June.

The library renovations were made from a reserve fund of prior gifts that were held aside for projects of capital improvement.

Fackler explained that often times money from gifts is not placed in the endowment because it is earmarked for projects in the short term or in the not so distant future. He used the example of buying a house. If you had ten thousand dollars for a down payment which you are going to make a month from now. You know you need that money in a month so you are not going to invest that money because no one can predict what the market will do in such a short period. The risk of not being able to buy the house if the market has a down swing is not worth the possible benefit of the additional money that can be made by investing.

Bates College's investment portfolio is available and any interested party can request a copy of all or part of Bates's investment programs.

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Last Modified: September 25, 1998
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