[Photo by Germina Garland-Lewis '08]

By James E. Leach

Professor Damhnait McHugh and her students are silhouetted against a seaside sunset in a photo that hangs in her Olin Hall office. McHugh's marine biology class (left) traveled to Mystic, Conn., "to see the salt marshes, the mudflats, and the rocky intertidal."

Colgate's endowment — just shy of $650 million at the end of 2006 — provides support for professors like McHugh as they conceive of opportunities such as the field trip to Mystic that enrich a student's education and earn the institution its place among the nation's best liberal arts colleges. At the generally accepted annual spending rate of 5 percent per year, the endowment will contribute more than $30 million to the university's operating budget next year, the equivalent of almost $11,000 for every undergraduate.

McHugh left Harvard in 1998 to join the Colgate faculty. As the nation's wealthiest university, with an endowment approaching $30 billion, Harvard commands resources that are beyond the imagination of most schools. Yet when McHugh, who was recently named to the G. Kirk Raab '59 Chair in Biology, considered the level of resources that would support her work with students at Colgate, she said, "I recognized that this is a place where, if someone has a great idea for a lab or field trip, it's, `Let's do it.'"

One of the strengths and attractions of a liberal arts college is the personal quality of the experience: the chance to attend small classes, collaborate with a faculty member on an original project, start an organization, mount a one-person show, have dinner with a Nobel laureate, work with the latest equipment, read the most recent journals. Usually, those opportunities come at a cost that increases as the experience becomes more personal.

Because many private liberal arts colleges are priced within a fairly narrow band, funds derived from tuition income are roughly the same at each. The margin of difference that funds those defining opportunities, then, comes largely from the support that schools receive from their endowments, combined with annual donations.

Comparison of endowments was a relatively esoteric part of the college selection process — overlooked, no doubt, by many families — until the late 20th century. But institutional wealth was brought into sharp focus in the 1980s by a burgeoning collection of guides to colleges. While some of those guides are subjective or even frivolous, others, most notably the ranking published by US News & World Report, incorporate objective measures that in many cases can be a proxy for institutional wealth.

Measures such as class size, student-to-faculty ratio, faculty compensation, and average educational expenditures per student are directly affected by the amount of support a college receives from its endowment.

Although 16th in the US News & World Report's top 25 liberal arts colleges rankings, Colgate falls to 24th out of that 25 in a comparison of endowment per student assets. A selection of 10 of those schools is shown here, with Bates 25th and Pomona 1st.

Wealthy company
Colgate sits in a precarious place among the top-ranked liberal arts colleges. "We are extremely fortunate to have a $650 million endowment," said Financial Vice President and Treasurer David Hale '84. "It gives us great financial flexibility, much greater than we enjoyed 15 years ago."

Yet, in a recent presentation to the university's Board of Trustees, at the top of Hale's list of "What Keeps the Treasurer Awake at Night?" was this item: "Competing with the very best colleges and universities in the country who are wealthier than Colgate." For while the size of the university's endowment ranks near the top 100 in the nation, in the important comparison of endowment per student, Colgate ranks 24th among US News & World Report's top 25 liberal arts colleges; only Bates has a smaller endowment per student.

Using figures from the 2006 Endowment Study of the National Association of College and University Business Officers, Colgate's endowment per student was more than $123,000 below the median for the USNWR top 25, and more than $700,000 below the endowment per student of Grinnell College. Even as Colgate was able to fund 16 percent of the current year's budget with annual endowment draw — a number that would be the envy of many colleges — 40 percent of Swarthmore's 2004 budget came from endowment (nearly $31,000 per student). Nearby Hamilton College, with a total endowment only slightly larger than Colgate's, enrolls 1,000 fewer students and thus benefits from an endowment per student that is more than half again the size of Colgate's.

The good news in a "Doing More with Less Index" compiled by Hugh Bradford, Colgate's director of budget and decision support, relates the USNWR rank to a school's endowment per student. Reflecting the efficiency with which Colgate manages its resources, the university appears third best on Bradford's list.

Despite an endowment per student that is 24th among the 25 top-ranked schools, Colgate this year was listed 16th in the comprehensive USNWR assessment. "Our endowment per student is less than quite a number of schools that rank below us and that do not offer such outstanding educational resources," said Provost and Dean of the Faculty Lyle Roelofs. "That's a notable achievement, which is only slightly lessened by the fact that we are larger than most of those institutions. We have a slight economy of scale advantage, but that's not enough to explain how much better we are doing."

Colgate's non-teaching staff is relatively small in comparison to other top-tier colleges. That is both a reflection of size (second largest of USNWR's top 25, and enrolling at least 1,000 students more than fully half the colleges on the list), and the reality of focusing discretionary resources where they will deliver the greatest academic impact. "We are very focused on resource allocation," said Hale. Roelofs and Hale also credit the work ethic of the Colgate faculty and staff, which Hale calls "that Colgate giant-killer thing."

Roelofs is quick to explain that the real advantage of Colgate's size "is that we can offer more — there's just more person power on the faculty to support programs like the core and interdisciplinary studies."

To anyone who might observe that reducing the size of the college would raise the per-student value of the endowment, Hale said, "It would really change the character of the place. We wouldn't have this university feel. We're trying very hard to deliver a broad, expansive program, at the same time delivering the intimacy and contact of a small liberal arts college."

History
Students of Colgate's finances lay much of the gap between its endowment and those of other top colleges to history. The late Howard Williams '30, in his History of Colgate University, noted that the Colgate family, beginning with James B. Colgate and continuing with his son James C. and other family members, regularly made up deficits in the university's operating budgets in the 19th and early 20th centuries. James B. grew accustomed to underwriting deficits during his 40 years as president of the Board of Trustees; James C. is said to have contributed more than $300,000 of his own money to make up deficits from 1899 to 1908. The practice continued to 1920, when the university adopted tighter budget controls and launched its first fundraising campaign in 70 years. That $1 million campaign funded a new gymnasium and added $517,000 to the endowment. "No longer would [the university] look to the Colgate family for its major support, but would turn to alumni, friends, and foundations," Williams wrote.

Two sources contribute to the growth of college endowments: gifts, and compounding investment return. The generally accepted analysis is that Colgate was a latecomer to the fundraising that establishes an endowment base, and that compounding has made it difficult to close the gap on colleges with larger endowments ("That old sayin' them that's got are them that gets," sang Ray Charles).

Managing the money
As college and university endowments have grown to hundreds of millions and more (more than $10 billion in the case of a half-dozen major universities), institutions have become more sophisticated in the management of their funds. Several universities with multi-billion-dollar endowments employ large professional investment staffs to track and invest funds.

Institutions with smaller but still substantial endowments in the $400 million to $1 billion range typically don't have the advantage of large staffs to oversee their endowments and rely on a combination of trustee expertise, in-house staff, and outside consultants. At Colgate, Hale was assistant treasurer and director of investments before becoming financial vice president and treasurer. Carolee White now holds his former position, and the two collaborate to provide the in-house investment resource.

Overall responsibility for Colgate's endowment lies with the Board of Trustees and is overseen by the board's finance committee, currently chaired by Dan Benton '80. The membership is a who's who of financial acumen from the alumni body.

"We meet four times per year in person, and another ten times by telephone," said Benton. "Our two subcommittees focus basically on hedge funds and on private equity and venture capital. We establish asset allocation targets that we review constantly by category. Over the past five years, for example, we've increased our equity exposure from 60 percent to close to 90 percent, which has helped our performance.

"With our consultants, we evaluate new managers in new areas of interest," Benton continued. "We vet many new managers every year, making recommendations to the full committee. Also, the finance committee as a whole has face-to-face or telephone meetings with every one of our fund managers at least once every year. We tend to cull the underperforming managers from the portfolio and redeploy money where we think people are doing a better job."

"We have become a very hands-on committee under Dan's leadership," said trustee and finance committee vice chair J. Christopher Clifford '67. "A lot of our discussion centers on whether we have the right asset mix. Over the years we have significantly reduced fixed-income securities and increased the international-global element in our portfolio." The reallocation reflects a trend among many colleges and universities to increase and diversify their equity holdings and protect against destabilizing losses in any one equity investment category.

Still, exceptional circumstances such as the stock market's dot-com bubble of the 1990s can tempt colleges and universities to tilt their portfolios to a more speculative posture.

Risk and performance
The remarkable returns enjoyed by some colleges during the dot-com run-up are well documented — as are the consequences when the bubble burst. Bloomberg.com recently reported the experience of MIT, which saw its endowment soar to $6.5 billion in 2000, only to fall to $5.1 billion in 2003. Like many colleges and universities that had come to rely on the increased support that was pouring in from their thriving endowment portfolios, MIT had to retrench when the bottom fell out, freezing spending and cutting positions. Further illustrating the risk-reward theory and the ability of large funds to recover, MIT's endowment had rebounded to $8.4 billion by June 30, 2006, after one-year earnings of 23 percent, the best by a major university.

Absent the kind of resources that would allow for major risk-taking, Colgate has traditionally been somewhat more conservative in its investment strategies. Said Clifford: "While we were tempted in the later part of the decade to increase our exposure to dot-com stocks, we realized that we had probably missed that opportunity and, fortunately, decided to maintain our value orientation."

As a result of that more conservative approach, over time Colgate's endowment has tended to outperform those of many wealthier institutions during down markets, while trailing somewhat the average posted by larger endowments during bull markets. Those strategies are regularly reviewed by the finance committee, which seeks a balance between maximizing returns and protecting the endowment income that supports the quality of a Colgate education. Endowments are, by definition, portfolios with very long-term investment horizons. Colgate's approach over the years has paid off, with the endowment generating an average annual total return of 12.4 percent for the 25 years ending June 30, 2006.

Hale credits the university's alumni and friends for rising to the challenge of building the endowment base with their gifts. His 2005 Financial Report includes a graph that illustrates the impact on endowment from gifts and the investment return on those gifts over the ten-year period from 1995 to 2005: fully 27 percent of the $502.4 million in the university's endowment on May 31, 2005, accrued from gifts and income on those gifts over the previous decade.

"What our donors have done so well is to shove Colgate into the upper echelon of schools," said Hale, adding, "What we can't do now is fall behind."

Perpetual support
Over the course of the fundraising campaign, "Passion for the Climb," staff and volunteers have set a goal of adding approximately $300 million to the university's endowment in both unrestricted funds and in endowed funds that support faculty chairs, financial aid, and signature programs such as institutes of advanced study, off-campus study programs, and student life initiatives. (By far, the vast majority of the university's endowment funds support need-based financial aid for students.)

Roughly three in every four dollars sought for the campaign is earmarked for endowment that will underwrite university programs in perpetuity. The balance of the campaign goal is designated for the Annual Fund, which provides spendable operating funds that Hale calls "essential," and for two major building projects: the Ho Science Center, and the Case Library and Geyer Center for Information Technology.

John Golden '66 is chair of the Board of Trustees. In the 1990s, with Van Smith '50 and the late Wm. Brian Little '64, Golden led a campaign over the course of which the size of the endowment increased from $170 million to $270 million. Said Golden of the newly announced campaign: "This is an opportunity for the broader Colgate community to truly step up. Annual giving continues to be a critical need. And for people who have the capacity to give to endowment, we have an opportunity under President Chopp's leadership to make a quantum leap forward.

"Colgate uses its resources very efficiently," Golden added, "whether tuition income, annual gifts, or endowment. We've done extremely well making do with less. But if we are going to make that commitment to be among the best, we have to fund it. With this campaign we have a chance to narrow that gap."

Peter Kellner '65 is one who stepped up to the endowment challenge, literally, in the advance-gift stage of the campaign. Responding to Dan Benton's $25-million challenge (see sidebar), Kellner specified his gift for unrestricted endowment, explaining, "I've always thought that's where you get the most bang for the buck." Added Kellner, "I'm very impressed with the quality of Rebecca Chopp's leadership, and the fact that Colgate has balanced its budget for 43 consecutive years is an indication of proper fiscal management. The trustees on the finance committee have broad experience in the financial world, and along with the people in the administration, they are most knowledgeable on how the money should be invested and spent. By giving to unrestricted endowment I feel like I'm giving the administration a powerful tool."

Trustee emeritus Bruce Calvert '68 chaired the finance committee during many of his years on the board and recognizes that prudent management of endowment assets is essential to keeping pace. But he also observed: "The gap between Colgate's endowment and those of our peers was created primarily by giving, and it is a gap that will be closed primarily by giving."

Endowment tale
The power of endowment to transform students' lives is illustrated in the experience of Shalene A. Moodie (Sam) Vasquez '99, from Queens, N.Y. Vasquez wanted the personal experience of a small liberal arts college.

An aspiring poet, she enrolled in a first-year seminar taught by poet and author Peter Balakian, who became her adviser for four years (Balakian holds the Donald M. and Constance H. Rebar Chair in the Humanities; funds from endowment have underwritten leaves that enabled him to complete a critically acclaimed memoir and a history of the Armenian genocide). Balakian played recordings in class that introduced Vasquez to the work of Nobel laureate Derek Walcott and other Caribbean writers ("It was ground-breaking to me," said Vasquez).

When Vasquez was a senior working with Balakian on her honors thesis in poetry, Balakian was serving as director of the Center for Ethics and World Societies. Endowed funds made it possible for Balakian, through CEWS, to bring Walcott to campus for a week as a visiting professor.

In an ongoing program funded by the dean's office with support from the endowment, Walcott dined at Merrill House on campus with Vasquez and her classmates. It was the second semester of her senior year, and Vasquez had a scholarship to attend law school ("My parents encouraged us to be doctors or lawyers").

"Derek read through some of my poems. He said I wasn't cut out for law school, that there was promise in my writing, and that he'd work with me." With help from Walcott and Balakian, Vasquez filed a last-minute application and won admission to Rutgers' graduate program in literature.

This fall, she took her new PhD to Dartmouth, where she teaches literature from some of the texts that she discovered in Balakian's first-year seminar. She recently admitted, "When I came to Colgate, I didn't know there was an endowment."