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The Dartmouth
June 21, 2024 | Latest Issue
The Dartmouth

College endowment rides prosperity wave

After an astounding investment return of nearly 23 percent last year, the College's $1.2 billion endowment is riding the wave of a strengthened economy, with returns far exceeding established goals.

College Treasurer Lyn Hutton said the 22.9 percent return for the 1996 fiscal year -- which ended June 30, 1996 -- left the College "well into the upper quartile" in endowment returns and vastly exceeded the College's goal of 12 percent.

The College's investments are also performing very well long-term.

In the last five years meeting the goal of 12 percent has "been pretty easy," with returns exceeding, on average, 15 percent, Hutton said. The five-year returns put the College in the upper 10 percent of endowment returns.

The College's 15-year investment history is solid.

"If you look at our 15-year record, we're at about 12 percent ... so we've met our goals," Hutton said.

The goal of 12 percent accounts for College spending, inflation and a slight projected return.

"The magic of 12 percent in this environment is that if you ... are spending four to five percent of average market value, have four to five percent inflation and [less than one percent] in expenses, then you're up at 11 to 12 percent to stay even or for a modest return of one to one and a half percent," she said.

Part of the endowment return is used to fund the programs or operate the buildings which the money was intended to support, Hutton said. The College's "spending rule" sets the amount at approximately four to five percent.

After inflation and other expenses, any remaining return is put back into the endowment capital to increase its real value and the investment funds. These heavy returns are due, in large part, to a favorable and expanding economy.

"The last few years were very good for financial markets and investments," she said. "Dartmouth participated fully and we're proud of the investment results."

But Hutton said the high rewards of the last few years are a very recent development.

"In the last 20 to 25 years, few institutions have done double digits," she said. "Some of us remember the 1970s and parts of the 1980s when it wasn't so nice."

With heavy inflation and low returns in the 1970s and 1980s, "a lot of endowments lost their purchasing power," Hutton said.

Even recent years have not always been kind. In 1994, the College earned a 7.7 percent return -- meager and well below the goal of 12 percent -- but still was ranked fourth in endowment return among larger endowments. "That year, we didn't quite meet our goal," Hutton said.

The College's investments are divided into a number of areas, since a balanced financial portfolio can help avert a loss if disaster strikes in one area.

Investments include domestic and international equities, venture capital, oil and gas, debt financing, real estate and traditional fixed-income investments, Hutton said.

As of March 31, 1997, the College had invested 38 percent of the endowment in domestic equities, 15 percent in international equities and 10 percent in venture capital and private domestic equity.

The target for these investments is 65 percent, leaving the College slightly under-allocated at 63 percent.

Within this investment group, however, Hutton said the College is "over the long-term target on the public side, and under it on the private side."

The College is approximately five percentage points under its target of 15 percent for venture capital and private domestic equity investments.

Hutton said this under-allocation results from the continued transfer of investments from the private to the public sector, as private companies begin to offer shares of their stock in the market.

"Getting back in [to the private investments] when that happens takes a while," she said.

The College invests approximately two percent of the endowment in oil and gas, two percent in private debt and two percent in distress debt. Hutton said these debt financing investments have a fixed return, much like a government bond, but that they are "not traditional bonds."

With six percent invested in real estate, the remaining 25 percent is allocated in traditional fixed income investments, which are low risk, but do not have the high return potential of some other investments.

Hutton said the College has too much of its endowment in fixed income, oil and gas and debt financing.

The target for all these investments combined is 25 percent, but current totals are 31 percent.

Real estate investments, meanwhile, are under the target of 10 percent, since Hutton said "it is hard to buy and sell property quickly" to meet targets.

These targets, of course, are only projected goals for investment allocation. "If we hit it at any quarter end, it's an accident," Hutton said.