Andover Endowment Expands

Phillips Academy’s endowment grew by 20.3 percent this past fiscal year, a significant increase compared to its performance over the past few years.

According to Stephen Carter, Chief Financial Officer, the endowment funds between 40 and 50 percent of the school’s yearly $100 million budget, which includes funds for financial aid, the Office of Physical Plant (OPP) and faculty salaries. The school generally aims for a yearly endowment return around 8 percent.

An endowment return refers to the amount the endowment grows on a year-to-year basis, according to Carter.

As of June 30, Phillip Academy’s endowment was worth just over $800 million, $135 million increase from last year’s, according to Michael Reist, Chief Investment Officer.

In relation to other prep schools, Carter said, “We did very well. We’re probably in the top 15 percent of our peer schools.”

According to “The Exonian,” Phillips Exeter Academy’s endowment increased by 13.7 percent over this past fiscal year, reaching a total of $969.1 million.

The endowment growth also exceeded the national average for higher education institutions. This past year, United States colleges and universities’ endowments returned an average of 19.8 percent on their investments, according to a preliminary study by the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute. The study surveyed 285 institutions.

The success of Andover’s endowment could have stemmed from gains in components of the school’s endowment portfolio. The school’s endowment includes investments in public equities, private equities, bonds, venture capital, hedge funds and real assets, according to Carter.

Carter said, “The public equities did incredibly well this year because the whole stock market was up… [and] because the market went up so much, we actually [increased by] 20.3 percent.”

Public equities are stocks that can be traded in the public stock market. At present, public equities make up about a third of the school’s endowment portfolio, while hedge funds make up another third, according to Reist. Hedge funds refer to groups of investments, which are managed by a financial advisor.

Though the makeup of the endowment has not changed significantly this past year, the last five years have featured an increase in investments in private equity and the hedge fund portfolios, according to Reist. Private equity investments are funds put into shares of privately held companies.

According to Carter, at any one time, the school probably owns “little pieces” of hundreds of companies.

In the past, Andover has profited from investments in companies including Skype, Yankee Candle and JetBlue.

Carter recalled, “We invested in JetBlue through some private equity fund… when it was just an idea. The [founder] developed it, created JetBlue, took it public, and we got some money back.”

The school has also increased investments in hedge funds. Because hedge funds are not as sensitive to the changes in the stock market, they offer investors more stability.

Carter explained, “If [hedge funds] have a large exposure to something risky, they try to do something that offsets that… so no matter which way things go [in the market], they either remain flat or go up.”

“However, because hedge funds spread out their money, when the stock market does experience gains, they do not achieve the same large returns as public equity investments. The hope is that [hedge funds] ride the wave up slowly, but when something happens [to the market], they don’t go down as fast,” he continued.

Carter said various real assets have been added to the school’s endowment over the past five years. Real assets are investments in tangible resources that can include real estate, oil and gas, minerals and timber.

“By spreading out your investments, you reduce your risk of taking a nosedive in one area,” he said.

Currently, however, Andover’s endowment is down by a few percent, mirroring a decrease in the stock market over the past four months. The Investment Office does not report monthly statistics, as each manager reports to the office at different times.

Carter said, “The market is down about eight percent since June, so we’re down a little bit less than that. We’re in negative territory right now, but everybody is.”

“The endowment bounces up and down during the year. It’s really hard to tell where you’re going to be at the end of the year. We’re hoping for [an] 8.5 percent [return] as usual,” he explained.

In fiscal year 2010, the endowment saw a return of 14.5 percent, though in 2009, the endowment decreased by 15 percent, the lowest return in recent years, due to the recession.

In 2007, the endowment return had reached a high of 21.2 percent, but decreased at the beginning of the recession in 2008 to 1.6 percent.

Carter also attributed 2007’s high return to gains in the stock market. “[2007] was the year before the bottom fell out,” he said. “That was when we had the housing bubble, and everything was overvalued.”

To weather the recession, the school “sat tight” on its investments, according to Carter. “We figured [the market] had gone down so far, there was no sense in selling, so we held onto everything,” Carter explained.

He continued, “In February of 2009, we started putting money back and started buying stocks when they were really cheap. Then, we took a huge ride up when the market went up from March to June.”

This gain brought the return up eight percentage points, from a decrease of 23 percent in December of 2008 to a decrease of 15 percent at the fiscal year’s end, in June 2009.

“It wasn’t great, but we were in a very different place,” said Carter. “A lot of the times, [the return] is only bad relative to how everybody else is doing. When we were down 15 percent, the average was down 19 percent, so we did pretty well.”

Though the 2009 decrease in endowment did not affect day-to-day student life, it did result in budget cuts for the school’s facilities renewal program and a reduction in raises for staff.

Carter added, “But we didn’t really take out any money from the day-to-day program, and we’re lucky that we were able to do that.”

Carter said, “Part of our financial structure is to have a certain amount of bonds that we have out… in other words, to have some mortgages out there.” Currently, the school has $93 million in outstanding bonds.

The planned renovation of Bulfinch Hall and construction of a new boathouse, however, will not be funded by the endowment but will instead be funded completely through gifts.

The Investment Office, headed by Reist and based in New York City, works with the Investment Committee, composed of Andover alumni and trustees, to outline and then implement the school’s investment policies.

Carter said, “Because we have the Investment Office… we’re able to put money where we want to put it, more quickly, and we’re able to knock on more doors and get access to more funds.”

The office periodically meets with the 50 managers who each represent a fund or firm handling a portion of the school’s investments.

Reist said, “Our day-to-day work is tracking the investments that we currently have, meeting with the managers, making sure we understand what they’ve done, what they’re doing, and what they may do in the future.”