Endowment falls about 20 percent

As of early December, Duke's endowment has lost at least 19 percent of its value in fiscal year 2009.

President Richard Brodhead announced the $1.2-billion drop in an e-mail obtained by The Chronicle that was addressed to faculty and staff Dec. 17.

In an interview Tuesday, however, Executive Vice President Tallman Trask said he suspected the endowment's losses had reached 20 percent. Michael Schoenfeld, vice president for public affairs and government relations, said the e-mail was sent with the best information the University had available. He added that the nature of the endowment requires looking at long-run performance rather than day-to-day fluctuations.

The market value of the endowment June 30 was $6.1 billion, according to the Web site of the Duke University Management Company, which oversees the University's endowment. That would put the current value at approximately $4.9 billion.

"I received messages from employees who were grateful for the information, apprehensive about the future, as you would expect, but also understanding that Duke will have to make choices in the future just like every family and every business," Brodhead wrote in an e-mail to The Chronicle.

Trask said the loss would translate to some $50 million less in income for annual budgets. In fiscal year 2008, University operating expenses totaled $1.96 billion.

In the coming months, all operating budgets will be examined for ways to cut costs.

Chopping-block conversations will be informed by updated market reports and the University's philanthropic situation.

"It's going to be a struggle for us to launch any major capital projects in calendar '09," Trask said.

Schoenfeld said planning for these investments-including the massive renovation of Central Campus and the expansion of the Medical Center-have reached natural pauses, which allow officials to delay any decision on them. He estimated that University officials could wait until late Spring to choose whether or not they would move forward with breaking ground.

It is also possible that the University will choose to borrow money to cover some operating costs, Trask said. Although this strategy is on the table at other institutions, he added that Duke has never borrowed for those costs before.

Brodhead's e-mail to faculty and staff and other sources have noted that endowment spending typically comprises 15 percent of Duke's annual budget. According to the FY 2008 financial reports released by Trask, however, investment returns made up 19 percent of the budget, and a five-year average of other reports shows a 16 percent portion of the annual budget.

Spending policies call for a payout of 5.5 percent of the endowment's three-year average value, and these practices are intentionally structured to compensate for difficult economic times.

Still, Trask said the deepness of this downturn would likely affect these averages, and the impact could be more significant in the next few years.

"[We've] never had a problem like this," Trask wrote in an e-mail. "The 3-year moving average has never been negative in the 15 years I've been here. So we've always been adding to reserves, to help cushion a downturn."

He added that this would probably work out for fiscal year 2010, but that 2011 could be "problematic."

Brodhead said that despite the losses, he would still characterize Duke's overall economic situation as strong.

"Even with the markets and economy in turmoil, Duke's asset base is stronger than it was even five years ago, though our ambitions have grown as well," he said. "We're not recession-proof, and we'll have to manage resources prudently in this challenging time."

The downturn has also affected several of Duke's peer institutions. Harvard University's endowment had lost at least 22 percent from its June 30 value, Harvard President Drew Faust said in a Dec. 3 letter to Harvard deans, and Yale University's endowment dropped 25 percent, Yale President Richard Levin said Dec. 16.

Indeed, the recession has probably soured returns for nearly every endowment and investment portfolio, said Emma Rasiel, associate director of undergraduate studies and associate professor of economics.

"When markets are this bad, almost all assets go down together, so it doesn't matter how well diversified your portfolio is; you'll still lose money," Rasiel said.

It will be important in the coming months to balance day-to-day obligations with the larger-scale projects intended to further the University's mission, officials said.

"Duke may be a relative youngster, but the decisions we make today have to stand up 10, 50, 100 years from now," Brodhead said. "The most successful universities are the ones that have a clear sense of where they want to go and continue to make progress toward essential goals in both fair weather and foul."