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May 27, 2004 | Read Time: 7 minutes

Chart: Where Harvey Mudd College’s Endowment Is Invested

Chart: How Harvey Mudd’s Endowment Has Fared: Year-to-Year Returns

Related articles: View all of the advice and commentary from this special supplement on endowments
By GOLDIE BLUMENSTYK

Harvey Mudd College, which turns 50 next year, enrolls just 700 students. That tiny student body, coupled with a small pool of alumni from which to draw gifts, has left the elite, science-focused, liberal-arts college very dependent on its endowment to cover its costs.

The endowment, valued at $183-million at the end of March, provides 23 percent of Harvey Mudd’s $30.7-million annual operating budget. For the past decade, the Board of Trustees has aimed to generate at least 75 percent of that contribution from dividends and interest on investments. For the rest, it draws from the endowment itself, an exercise that tends to be easier to swallow in years when the endowment has appreciated in value.

The 75-percent guideline, which led the institution to favor investments that pay dividends or produce interest, was adopted by the trustees in 1995 as a conservative approach to meeting the California college’s financial needs. College officials say a guideline this high is uncommon for colleges. It was “driven by the fact that we’re so darned dependent on the payout,” explains Barry C. Olsan, the assistant treasurer.

As it turned out, the guideline also kept the endowment from losing its shirt when the stock market fell sharply in April 2000.

Unlike many other institutions, Harvey Mudd had avoided the so-called growth stocks, which are designed to produce value through appreciation. Instead, it had stayed focused on bonds and dividend-paying “value” stocks because it needed the income they would produce for 75 percent of the payout.

“In one way, that kept us out of trouble,” says Mr. Olsan. Although the college’s portfolio had a negative return for that 1999-2000 fiscal year, its loss of 0.47 percent was far smaller than that of many other institutions that year.

“We missed the high highs, but we’ve sure missed the low lows,” says Harvey Mudd’s president, Jon C. Strauss.

Gary Rollé, the chairman of the Board of Trustees’ investment committee, says the college was also helped by a decision in the late 1990s to shift about a quarter of its assets out of stocks and into bonds. In the four years preceding that move — the 1995, 1996, 1997, and 1998 fiscal years — the college had enjoyed returns of 17 percent, 19 percent, 26 percent, and 17 percent, respectively. But Mr. Rollé and his fellow investment-committee members sensed that those bull-market returns would not last. Members were concerned that a bubble was about to burst, he says.

Now, with many investment experts warning that this recent period of low inflation may be coming to an end, Harvey Mudd is again repositioning itself. Earlier this month, the trustees agreed to “temporarily suspend” the 75-percent guideline.

Both moves came at the urging of the college’s investment advisers, Cambridge Associates. Cambridge had been warning trustees that the guideline was creating a financial risk for the college. With interest rates at their lowest in 45 years and dividend yields also at record lows, the advisers said, the only investments that could produce enough income to satisfy the 75-percent guideline were those that happened to be the most expensive.

In other words, the advisers feared that the college was letting its desire for current income overly influence its investment choices. The trustees agreed.

The decision was actually a reflection of recent realities. The college has not been able to meet the guideline since the 2000 fiscal year. Last year it produced only 60 percent of its payout from current income. This year income makes up less than 50 percent of the $7,249,000 that the endowment provided for operations.

“In years when it’s too low, you hope for gifts instead of having to liquidate stock” to fill the gaps, says Mr. Olsan. But, he adds, “that’s not going to happen this year.”

Donations to the endowment have fallen off in the current academic year because donors are instead making gifts to two other projects that the college has been emphasizing: a new dining hall and a new residence hall.

The projects, together with a new energy plant to service them, will cost about $15-million. Mr. Strauss is especially excited about the residence hall, which is to open in August. For the past four years, students have been living in the college’s president’s house, while he and his family have lived off campus.

In a typical year, gifts to the endowment total about $3-million; this year the college expects to receive no more than $1-million. Overall giving to the college may also be down this fiscal year because of the economy. (In the 2002 fiscal year, Harvey Mudd received $14-million in gifts; in the 2003 fiscal year, it received $12.2-million.)

Mr. Strauss says he expects that when the college begins its next fund-raising campaign, gifts to the endowment will be a high priority. The college is still in the early stages of planning for the drive.

In the meantime, Harvey Mudd officials are focused on building the value of the endowment through its investment strategy. “It’s either increase the endowment or increase the payout rate,” says Mr. Rollé, and the trustees are generally reluctant to alter the payout rate.

If the endowment value increases, the amount the college can use for operations will also go up. In the next academic year, the endowment will provide 22 percent of the budget, or about $7.1-million. The rest will come from tuition and fees (64 percent), gifts and grants (10 percent), and other sources.

The amount coming from the endowment is lower than the $7.25-million in the current year’s budget and less than the $7.57-million called for by the spending-rate formula. But because of another part of the formula, which places a cap on endowment payouts based on the value of the endowment in the past three years, the college can’t get the full amount from the formula. “We’re still feeling the down effect of prior years’ performance,” says Mr. Strauss, the president.

Had investment returns been higher in the past three years, that cap on the payout might not have kicked in.

In the 2003 fiscal year, the latest for which data are available, Harvey Mudd ranked 27th among private colleges in endowment assets per student. Mr. Strauss says he realizes the value of the endowment creates “wonderful” opportunities for the college, including a student-faculty ratio of about 8 to 1.

Along with the suspension of the 75-percent guideline, the investment committee has been taking steps since January to protect itself against market changes.

It calls one of these strategies “inflation hedging.” To carry out the strategy, the college has invested in a fund that buys real assets like timber, oil, and land, which tend to keep their value during inflationary periods. It also has bought Treasury Inflation-Protected Securities and U.S. Treasury Notes, both of which are sold by the U.S. Treasury. TIPS protect against inflation risks because, at maturity, investors get back their principal plus an additional sum to account for inflation that occurred during the period of the investment.

The college has also moved slightly into “alternative investments,” including a fund that invests in private companies and another fund that uses a number of sophisticated strategies designed to capitalize on fluctuations in stock prices and interest rates.

Altogether, says Mr. Olsan, the college is shifting about $20-million toward these new investments, taking most of the money from bonds and from U.S. equities.

The move to alternative investments is a departure for Harvey Mudd. But while its allocation — 3 percent — is fairly small, compared with the approaches taken by many other institutions, the college’s vice president for finance, Andrew R. Dorantes, says he doesn’t expect any additional moves in that direction.

“I think that’s it for us,” he says. Investment advisers might be recommending a higher allocation for Harvey Mudd and many other colleges, but the trustee committee that oversees Harvey Mudd’s endowment, which includes many investment professionals, is not looking to be like the rest of higher education. “The group is very astute and conservative,” Mr. Dorantes says. “They don’t necessarily want to be average.”

WHERE HARVEY MUDD COLLEGE’S ENDOWMENT IS INVESTED

Alternative assets	3%

U.S. equities*	48%

“Inflation-hedging” investments	5%

Global equities	17%

Fixed income and cash	27%

Total: $183-million as of March 31

* Since April the college has been taking steps to move about $10-million from this category to fixed income and cash, which would reduce this percentage to 42.5 percent and increase the other to 32.5 percent.
SOURCE: Harvey Mudd College

HOW HARVEY MUDD’S ENDOWMENT HAS FARED: YEAR-TO-YEAR RETURNS

1973-’74		-3.76%

‘74-’75		9.02%

‘75-’76		6.07%

‘76-’77		5.03%

‘77-’78		1.17%

‘78-’79		8.57%

‘79-’80		7.57%

‘80-’81		8.77%

‘81-’82		10.28%

‘82-’83		24.98%

‘83-’84		0.20%

‘84-’85		24.60%

‘85-’86		23.60%

‘86-’87		12.58%

‘87-’88		-2.29%

‘88-’89		20.27%

‘89-’90		7.33%

‘90-’91		10.05%

‘91-’92		13.13%

‘92-’93		13.35%

‘93-’94		2.39%

‘94-’95		16.79%

‘95-’96		19.46%

‘96-’97		25.95%

‘97-’98		17.07%

‘98-’99		4.44%

‘99-2000		-0.47%

2000-’01		6.96%

‘01-’02		-2.08%

‘02-’03		4.96%


SOURCE: Harvey Mudd College