Although losses are large, officials say the drop is in tune with the national average.
By Laurie Babinski
Art Editor
The Pepperdine endowment dropped 8.6 percent in fiscal year 2002 for a $37 million loss, an investment return that reflects the negative economic environment that caused the endowments at 654 universities across the nation to drop an average 6 percent.
The numbers, released by the National Association of College and University Business Officers late last month, reflect the second year endowments have yielded a negative average in a faltering market.
The endowment, meant to provide permanent capital and an ongoing stream of current income for the university, is intended to support the university in perpetuity. It seeks to maximize long-term total return consistent with prudent levels of risk. The Pepperdine endowment’s overall loss for the fiscal year from June 30, 2001, to July 31, 2002, equals just over $37 million.
“We are very unhappy with the returns, but we don’t look at it in dollars,” university Treasurer Clariza Mullins said. “We look at how we did in comparison to everyone else.”
Investment returns are expected to preserve or enhance the real value of the endowment to provide adequate funds to sufficiently support the university and its operating budget. Last year, the endowment comprised 9 percent of the university’s steadily rising operating budget for a total contribution of $16.4 million.
While the return on Pepperdine’s endowment investments was almost 3 percent lower than the NACUBO average reported by the Chronicle of Higher Education, Mullins said Pepperdine is actually faring well in comparison to other colleges and universities.
The California Institute of Technology in Pasadena, for example, lost 15.5 percent of its endowment value for a $211 million total loss, according to the NACUBO survey. Claremont McKenna College fared worse with a 20.4 percent loss, a drop of more than $75 million.
The reason for the university’s good fortune, Mullins said, is a “thoughtfully crafted” and diverse asset allocation spread out among cash, international and domestic stocks, bonds and alternative assets.
“The only winners this year were cash and bonds,” Mullins said. “But we will continue to operate within our target allocation. We don’t chase today’s (winning stocks).”
And not chasing the winners, Mullins said, has allowed the Pepperdine endowment investment pool to perform a little behind average in good markets but above average in sagging markets.
“We look at it monthly, we look at it quarterly, and it’s ugly,” Mullins said. “I think we’re in a good position, but it’s a tough environment.”
On average, without consideration for the health of the market, the endowment’s portfolio is expected to achieve a total return of 5.5 percent calculated over a rolling five-year period and taking into account inflation and investment-related expenses. The rolling calculation allows for negative return periods without allowing them to severely affect the endowment, Mullins said.
“Right now we won’t see any difference,” Mullins said. “That may change if we have a few years of negative returns, but we’re in a good spot right now, relatively speaking. That’s about all we can ask for.”
Despite the loss, the endowment has significantly grown over the past five years, from a total value just under $200 million in 1997 to a peak of just over $400 million in 2001. It currently accounts for more than half of Pepperdine’s assets and reaping a 101st ranking in endowment size among the 611 colleges and universities that responded to the endowment survey of the National Association of Colleges and Universities Business Officers.
Helping offset the loss, Mullins said, is the recent acquisition of $50 million in a trust fund acquired when Pepperdine sold stock in the Hydril Company when the company went public in 2001.
According to Pepperdine Controller Paul Lasiter, the Hydril Company was founded by Frank R. Seaver, donor and namesake of Seaver College who gave Pepper-dine a stake in the company when it was still privately owned. Though not technically part of the endowment, the profit from the sale sits in a trust, released to the university at a rate of either $1 million per year or the total investment income from the trust, whichever is greater, Lasiter said.
Performance results are reviewed annually by the Board of Regents-appointed Finance and Investments Committee, which is responsible for approving investment management policies, objectives and guidelines as well as monitoring investment performance results and approving annual endowment spending rates. The committee includes members from inside and outside the immediate Pepperdine community, such as Chancellor Dr. Charles Runnels and MBA alumnus and former California State Treasurer Matthew Fong.
But is the market poised to turn around?
“I just don’t know,” Mullins said. “Neither does anyone else. The fundamentals are good, but the investor psychology is bad. Investor confidence is down, and world geopolitics would make it tough. I just don’t know.”
February 06, 2003
