A leveling recession in higher education

The Economist explains why the global recession is killing the budgets of higher education:  Harvard will have to take a “hard look at hiring, staffing levels and compensation”, wrote Drew Faust, the university president, on December 2nd in a surprise letter to Harvard deans. The Harvard endowment, which was worth $36.9 billion at the end of June, has since lost at least 22%, says Ms Faust. The university should brace itself for losses of 30% in the fiscal year to next June, she adds, although even that may prove far too optimistic. Its ambitious plans for new buildings on the other side of the Charles river seem likely to be scaled back, or at least slowed down. Harvard is not alone. At Stanford University, the president, provost and other senior executives have taken a 10% pay cut. There is speculation that its endowment, which at $17 billion in June was third only to Harvard’s and Yale’s, has performed horribly since then. Many smaller endowments—only six were bigger than the $8 billion that Harvard says it has lost so far—have suffered too. Williams College has seen its endowment plunge by 27%, from $1.8 billion to $1.3 billion, while Wesleyan University’s has tumbled by 24% to $580m. The scary thing about the article is that these schools did not follow the "Yale model" of portfolio investment -- a model that will sound familiar to those who know anything about sovereign wealth funds:  The creator of the Yale model is David Swensen, who was persuaded by James Tobin, a Nobel-prize winning economist, to become the university’s chief investment officer in 1985, when the endowment stood at just over $1 billion, and increased it by June of this year to $22 billion. As Mr Swensen explains in his influential book, “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment”, which was published in 2000, the “permanent” endowments of universities (and of some charitable foundations) meant that they could be the ultimate long-term investors, able to ride out market downturns and liquidity droughts. By investing heavily in illiquid assets, rather than the publicly traded shares and bonds preferred by shorter-term investors, an institution with an unlimited time horizon would earn a substantial illiquidity premium. By 2006, Yale was aiming to invest a staggering 69% of its endowment in illiquid alternative asset classes such as hedge funds, private equity, property and forests. Others followed. According to “Secrets of the Academy: The Drivers of University Endowment Success”, a new study by Josh Lerner, Antoinette Schoar and Jialan Wang in the Journal of Economic Perspectives, Ivy League endowments increased their allocation to illiquid assets from 9.3% to 37.1% between 1993 and 2005. On average, universities raised their allocation from 1.1% to 8.1%. (emphasis added) This suggest suggests another arena where the state is going to be playing a larger role than it has recently.  Until recently, the standard lament from the "public Ivies" on down had been that the endowment explosion from the elite private schools had opened up an appreciable gap in resourcesbetween public and private schols.  No longer.  The downturn is going to hammer the schools with the biggest endowments.  Those with the smallest -- that would be public schools -- should be better equipped to ride out the downturn.