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Net Decline in MIT Endowment

By Lauren E. LeBon

STAFF REPORTER

MIT WAS ONE OF TWO AMONG THE TEN RICHEST UNIVERSITIES IN THE NATION TO SEE A SLIP IN ITS ENDOWMENT LAST YEAR, ACCORDING TO A REPORT ISSUED IN JANUARY FROM THE NATIONAL ASSOCIATION OF COLLEGES AND UNIVERSITY BUSINESS OFFICERS.

At the end of the 2003 fiscal year, last June, MIT’s endowment slipped by 4.2 percent from 2002 to $5.1 billion. Meanwhile, the endowments at several other major universities, including Harvard, Princeton, and Stanford, have all increased over the past year. Ninth-ranked Emory University saw a decline in its endowment of 11.9 percent.

MIT’s endowment is currently the sixth largest in the nation, behind those of Harvard, Yale, Princeton, the University of Texas system, and Stanford.

Several factors lead to decrease

The value of the endowment can change as a result of gifts and pledges donated to the university, investment performance, and expenditures, said MIT Treasurer Allan S. Bufferd ’59.

The combination of these three aspects leads to the dollar value of the endowment. In 2003, although investments were positive, gifts decreased and expenditures increased, leading to a net drop in the value of the endowment, Bufferd said.

In a Jan. 25 Boston Globe story, Executive Vice President John R. Curry said that venture capital funds were the main cause of the slip in MIT’s endowment funds.

Bufferd said that while venture capital loss “was clearly a factor in 2001 and 2002,” the decline has “bottomed out,” and did not effect the 2003 report in any major way. Currently, venture capital funds represent less than 10 percent of MIT’s total investments, he said.

Instead, Bufferd cited changes in types of gifts to the Institute, limited exposure to hedge funds, and the weak real estate market in Cambridge as possible causes for the 2003 decline. Also, while MIT has seen a positive return on investments in 2003, investment results were not as strong as those at peer institutions, he said.

Hedge funds typically earn income by investing against a predicted change in the value of a stock. That is, if you anticipate a stock to fall tomorrow, you can sell the stock today and buy it back when it becomes cheaper, yielding a profit. This can be practiced when the market is falling, or can be done on an international level, taking advantage of rising and falling currency rates.

While MIT received roughly the same amount in gifts in ’02 and ’03 ($236 million in ’02 and $237 million in ’03), the amounts designated for specific projects outside the endowment changed. Bufferd said that gifts received for the endowment were “significantly less” as compared to those in 2002 and “decreased by about $50 million.”

Gifts can be either designated for a specific purpose, such as a building project, scholarship funds, or research, or they can be contributed to the endowment, in the hopes that investment returns will fund a project.

“We’re in the midst of a fairly major capital campaign which by many measures has been enormously successful,” Bufferd said.

In addition to the changes in the nature of gifts, Bufferd said that MIT’s limited exposure to hedge funds may have affected the endowment.

Bufferd said that the managers of MIT’s endowment are using hedge funds, but less frequently than other universities.

In addition, the weak real estate climate in Cambridge has brought down income from MIT’s land holdings, as both income from tenants and the appraisal value of real estate has slipped.

Officials hope to attain stability

Provost Robert A. Brown told The Tech in November that this should be the last year the endowment shows a downward slope, and that he expects it to grow in the next fiscal year.

“We made judgments that served us extremely well in the late 90’s, but lately they haven’t served us as well” as the stock market has suffered, said Alexander V. D’Arbeloff ’49, former chair of the MIT corporation and member of MIT’s Investment Committee.

Bufferd said that the endowment was “up significantly” by roughly a few hundred million in December compared to last June. The market has been on an upward trend since March of last year, and MIT has mirrored that growth, he said.

There are still five months to go in the 2004 fiscal year, and much can transpire in that time, he said.

“It's always tough going through market volatility, but all of us are very long-term investors, and we do come through these patches,” Curry told the Globe.

The Institute’s budget crunch prompted officials to close the school over winter break, freeze faculty and staff salaries, and to layoff approximately 250 MIT employees in an effort to save $35 million. According to Provost Robert A. Brown, MIT expected to save $10 million by freezing salaries. The amount of money saved by the holiday closures and layoffs is not yet available.