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Making sense of Carleton’s endowment

<rleton’s endowment grew 8.4% in the most recent fiscal year, nearly tracking the national median for fiscal year (FY) 2018, according to the College’s Investment Office.

According to investment firm Cambridge Associates, the median endowment return in the last fiscal year was 9.0%. Cambridge Associates monitors endowment returns across 160 U.S. colleges and universities every year, including Carleton.

As of June 30, 2018, the end date of FY 2018, the endowment and long-term operating funds, which are managed alongside the endowment, were together valued at $924.2 million, according to Chief Investment Officer Kelsey Deshler. The endowment alone was valued at $878.5 million on the same date, according to the Business Office website.

Carleton’s endowment is an investment portfolio, or a pool of funds that is portioned into several different types of investments, or asset classes. According to a January 2019 Investment Office presentation, the endowment “provides a permanent source of income for the College.”

Endowment funds are invested primarily with the long-term in mind, yet the endowment also supports part of the College’s annual operating budget. “The idea is to generate income for today’s needs while preserving capital for our future generations,” said Deshler.

As of April 2018, endowment earnings account for 20% of the college’s operating expenses, whereas student fees support 71% of the operating budget. According to College President Steven Poskanzer, the Every Carl for Carleton capital campaign aims to readjust this balance, meaning that the college hopes to rely more on endowment earnings, and less on tuition dollars, to fund the college’s operating expenses in the future.

In order to invest with the long-term in mind, the Investment Office has to consider possible risks and rewards that come from different types of assets. This approach—not having all eggs in one basket—is known as a diversified portfolio, which Deshler also described as an “all-weather portfolio.”

“Whether the markets are up, down or flat, we have to deliver that to the college,” added Deshler. “That’s the backbone of why we need to have such a diversified portfolio.”

The Investment Office invests portions of the endowment into different asset classes, or types of investments.

According to Grant Steele, Senior Director at Cambridge Associates Institute, “the trend toward diversifying portfolios was pioneered by the largest endowments decades ago, and meaningful differences between the average asset allocation of large and small portfolios still remain today.”

If the entire endowment were invested in technology companies, for instance, it could grow incredibly—but it could also shrink dangerously, as was the case in 2001 when the dot-com bubble burst. Even if the endowment were to lose a significant amount, under Carleton’s spending policy, it would still be required to provide the college with at least 70% of what it did the previous year.

34% of Carleton’s endowment is currently invested in public equities, meaning stocks, or shares of publicly traded companies. 26% of the endowment is currently invested in marketable alternatives, which include unconventional techniques, like derivatives and futures. 15% of the endowment is invested in private equity, or shares and funds that are not publicly traded. 14% of the endowment is currently invested in real assets, or tangible investments, like real estate, commodities and natural resources. Finally, 11% of the endowment is currently invested in fixed income and cash, or investments with predictable returns, like bonds and treasury notes.

Deshler attributed growth in equity markets as an important driver of the college’s 8.4% endowment growth in the last fiscal year.

“Equity markets have been very strong since the global financial crisis,” said Deshler. “That’s been the driver for most portfolios.”


Deshler added that other long-term investment portfolios, like 401(k) plans and other retirement accounts, have also seen gains from equities.

Deshler noted that while equities are valued daily, gains from private equity are sometimes unrealized. Private companies are valued quarterly, rather than daily, and sometimes gains and losses from initial public offerings—when companies “go public,” or transition from being privately held to being traded in the stock market—and from mergers and acquisitions—when companies join together, or when one buys another—delay the process of accounting for gains and losses.

“The strongest returns [in FY 2018] came from private markets,” said Steele. “In general, endowments have been moving capital to private investment for the past several decades.”

Going forward, Deshler is interested in growing the portion of the endowment that is invested in private markets, including private equity and venture capital, but noted that alternative investments like these tend to be riskier. “I want to be very deliberate and thoughtful about where we allocate,” she added.

Deshler noted that international equities are also a high priority for the Investment Office’s 2019 strategy. While U.S. equities benefited from a zero interest rate environment for many years, she explained, the Federal Reserve’s ongoing interest rate increases, as well as its move away from quantitative easing, suggests greater investment opportunities in the same asset class—equities—–in other countries. Deshler’s team is actively looking into both developed and emerging markets on other continents.
“Our greatest long-term challenge economically and operationally is that we’re under-endowed in where we want to be and against peer institutions,” said Poskanzer. Although US News & World Report ties Carleton with two other schools for fifth best liberal arts college, Carleton’s $88 million endowment is the only of top eight to be valued under a billion dollars and has the lowest endowment per student ratio of any of the top ten (using endowment sizes from each college’s website and the most recent student populations reported by US News & World Report).

Poskanzer added that, unlike a lot of past Carleton capital campaigns, as well as capital campaigns at peer institutions, the Every Carl for Carleton capital campaign is an “endowment-heavy campaign.” Every Carl for Carleton aims to earmark $250 million of its $400 million target—or more than half of the capital campaign—to the endowment, meaning that $250 million would be invested according to the Investment Office’s strategy.

Poskanzer noted that, in terms of the college’s strategic planning, what ultimately matters is endowment per student—the ratio of the college’s endowment to the number of enrolled students—not just the overall value of the endowment. “Endowment per student matters a lot more than endowment in raw numbers,” he said.

More endowment per student would translate to more financial aid, more funding for unpaid internships through the Career Center, and the ability to hire more faculty, among other benefits.

“The sort of benefits that schools with larger endowments per student are seeing are really tangible,” said Poskanzer.

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