2009-2010 Endowment Report
I am pleased to issue the treasurer’s report on endowment activity at Trinity College for the year ended June 30, 2010. The endowed funds of the College are invested primarily through a unitized pool of investments under management by the College’s primary investment manager, Investure, LLC (Investure), and supervised by the Trustee Investment Committee. It is the objective of the College to earn an annual investment return of planned endowment spending, five percent, plus long-term inflation estimated at three percent, plus an additional one percent for real long-term growth. On June 30, 2010, the market value of the endowment had equaled $356.7 million, rebounding significantly from our low point of $270 million in March 2009. Total return amounted to 15 percent for fiscal year 2010.
Fiscal year 2010 marked a continuation of the rebound in global markets that began in the spring of 2009. As of June 30, 2010, the MSCI All Country World Index returned +12.3% for the fiscal year. The global bull market retreated considerably in the second quarter of 2010, halting the upward movement that began at the March 2009 market bottom. The continuing emergence of sovereign debt problems in Europe stands as evidence that the global financial system has not entirely healed. Throughout the year investors sought to reduce their risk through the bond markets even as treasury yields plummeted to all-time lows. As governments continue to inject money in attempts to induce spending, worries over inflation and new asset class bubbles set the tone for a nervy and unstable recovery.
As noted above, the Trinity endowment had positive returns of 15% during Fiscal year 2010, following a negative return of 21.2% and 6.4% for fiscal year 2009 and 2008, respectively. The endowment continued to enjoy sufficient liquidity during the fiscal year and was not subjected to the worst of the institutional level stresses detailed by some of the nation’s most prestigious universities in the financial and college/university press. The College’s portfolio manager, Investure, continued to focus on improving liquidity in the portfolio and began an investment theme focusing on banks, distressed assets, and real assets while keeping a close eye on the potential emergence of either deflation or inflation in the market. The College administration continued its spending prudency by keeping its spend rate at a nominal 5.4% for 2010, and electing to reduce its spend rate to 5% for 2011 and calculate draws on a more conservative actual value approach.
A review of the graph to follow shows the magnitude of the impact the market collapse and subsequent recovery has had on Trinity’s endowment.
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A review of Trinity’s investment performance against similarly traded indices for the same period gives comfort that our portfolio management team, Investure, with the active assistance of our Investment Committee, have been working diligently to safeguard Trinity’s most valuable asset, its endowment. For the fiscal year ending June 30, 2010, the Endowment Blended Benchmark* and MSCI All Country World Index yielded returns of 13.6 percent and 12.3 percent respectively, while the S&P 500 Domestic Equity and MSCI Emerging Markets Index were 14.4 percent and 23.5 percent respectively. In the graph below, you will see Trinity’s blended returns have fared comparably better than these benchmarks.
* The Endowment Blended Benchmark is a blend of the various indices established by the Investment Committee that allows returns to be compared more closely with the Endowment's asset class.
Trinity’s asset class diversification continues to play a key role in safeguarding capital and maximizing returns. Since Investure obtained custodial control of the Investment activity in December 2007, the Investment Committee mandate that, “a thoughtfully diversified portfolio provides necessary protection of the Colleges assets,” has been strictly maintained. However, many new lessons have been learned during the current economic climate such as: diversification may have limited value over short time frames (0-3 months); the ongoing liquidity crunch makes it difficult to diversify; and low (or negative) correlation assets can be expensive for perpetual institutions and are not entirely dependable.
At June 30, 2010, Trinity’s combined asset allocation was as described in the following chart:
The Trinity endowment is well diversified across asset classes and managers. The key to the investment strategy remains access to outstanding managers who exercise considerable flexibility looking for investment opportunities. At the margin, new investments in fiscal 2010 were made in areas that would respond to an uncertain economic environment: credit and distressed debt, failed or winner (surviving) banks, high quality equities, and real assets. The Trinity portfolio also continues to hold extra cash in order to provide liquidity to meet the College’s needs should the market turn negative and for opportunities that may become available in a distressed market.
The College’s Investment Committee of the Board of Trustees determines Trinity’s investment policy. Two of its major responsibilities are: (1) establishing allocations to investment vehicles through recommendations of Investure and (2) monitoring investment performance. Trinity’s endowment investment objective is to provide average long-term returns greater than the rate of inflation, plus the College’s average rate of spending from endowment, thus providing financial operational support to the College while . This policy seeks to give equal consideration to both the current and the future needs of the institution.
The next table shows the importance of achieving established goals and objectives as it directly affects each student at Trinity:
The Investment Committee’s continued commitment to preserve endowment assets are shown in the 10-year trend below. In fiscal years 2009 and 2010, Trinity management maintained fiscal discipline by continuing its policy of reduced endowment spending. The endowment spending rates for both fiscal years 2009 and 2010 were 5.4% respectively, the lowest in the last decade with continued planned reductions to 5% for 2011 and beyond. It is expected that the endowment will continue its growth in the future through continued prudent investing, conservative spending, plus significant philanthropic support.
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Like most college and university portfolios, Trinity’s endowment funds are composed primarily of investments that are entirely controlled by the College and can be bought and sold by the Board of Trustees acting through its Investment Committee. The largest segment of funds is known as the consolidated endowment. These funds were received from donors with the restriction that principal is not expendable. A smaller segment, known as funds’ functioning as endowment (sometimes called quasi endowment,”) has been established by our governing board for the same purpose as endowment. Unlike the funds in the consolidated section, the principal of these funds can be expended at the discretion of the Board. Both segments are pooled on a market-value basis, with each individual fund subscribing to or disposing of shares based on the market value, at the beginning of each monthly period that transactions take place. Distribution of endowment income (draw) is based on the number of shares subscribed to at the end of each calendar year.
The College’s income earned by the endowment represented 16% of total operating revenues for the College in fiscal year 2010. Every dollar of endowment income supports Trinity’s student body, faculty, staff, and facilities. The endowment allows the College to invest in its faculty, library, laboratories, new technologies, and other physical assets. Endowment income also now provides 15% of the value of scholarships awarded to our undergraduates. Those endowment earnings provide budgetary funds for such scholarships and are often the main reason why many qualified students of widely diverse backgrounds with great financial need are able to avail themselves of a Trinity education.
The following graph depicts the diversification of Trinity’s endowment purpose. In 1985, there were 630 funds with a market value of $63.3 million. At June 30, 2010, twenty five years later, 994 funds appear on the books with a market value of $356.7 million. These notable gains can be attributed primarily to the three successful capital campaigns, which were completed during this 25-year span and the strong performance of our investments.
Knowing that most endowment funds remain with an institution in perpetuity, institutions can conduct short and long-range planning with the earnings provided. Trinity’s endowment has been a key component of the annual operating budget and has provided budget relief for 16% of its annual expenses. This amount is low compared to many of our peer institutions whose endowments provide 20% to 40% or more for budget relief. As illustrated below, Trinity’s endowment was well below the $658 million median size endowment of 15 peer institutions, including NESCAC (New England Small College Athletic Conference) members at June 30, 2010. Historically, this has been the case.
Looking forward, Trinity’s endowment performance has been strong thus far during fiscal year 2011. Significant lost earnings resulting from 2009 have been restored; however, the endowment remains well below its historical high watermark of $440 million reached in June, 2007. It is the aspiration of Trinity to reach an endowment level of $750 million. An endowment of this size would allow flexibility for the College to increase operating budgets for financial aid, faculty and staff salaries, improve student/faculty ratio, adequately address maintenance issues of the campus buildings and grounds and increase academic departmental operating budgets, all of which support and enhance the academic excellence delivered inside and outside the classroom.
Respectfully submitted,
Paul Mutone
Vice President for Finance and Treasurer