Pennsylvania State University's $1.83 billion endowment is likely to weather the school's coaching scandal with no permanent scarring, endowment experts believe.
On Nov. 21, Moody's Investors Service warned of “material risks” for the school, including a chill on admissions and reduced state and federal funding to support the $4.5 billion operations budget.
There is no question that Penn State as a whole will experience what Moody's experts call “reputational damage and elevated financial risk ... stemming from allegations of sexual abuse by an assistant football coach,” but the ratings agency's report also noted that the endowment enjoyed $235 million in total private giving this year, “among the highest of all US public universities.”
When asked how such a scandal could affect an endowment, John Griswold, executive director of Commonfund, Wilton, Conn., said: “There might be a temporary lull (in giving), but it tends to come back.
“Long before it would affect endowments, it would be felt in annual giving and pledges. Endowment donations usually come from the most loyal and sophisticated donors. Penn State is a big university with tens of thousands of wealthy alumni,” Mr. Griswold said.
“The people who give to these institutions are passionate about the institution,” agreed Rae Goldsmith, vice president of the Council for Advancement and Support of Education, a Washington-based organization for college development and marketing professionals. In a campus crisis, “we typically see giving drop significantly, particularly in the program that is the focus of the crisis, but return quickly. When they see leadership addressing the problems, they will start giving again.”
In the meantime, the impact on the endowment “will be minimal,” Ms. Goldsmith said, “particularly when you think about the fact that the returns that they rely on are mostly based on a three-year average. That helps stabilize and allow for planning.”
David Branigan, executive director of Penn State's Office of Investment Management, University Park, Pa., declined to comment on the potential impact the football scandal would have on endowment investment decisions. The fund did buy some breathing room a year ago by increasing daily liquidity to 51% from 50% and decreased illiquid alternative assets to 24% from 26% to take advantage of improving equity markets, according to its fiscal 2011 review.
In the report, Penn State endowment officials credited public equity performance for much of the fund's 23% return for fiscal 2011. The endowment's asset allocation as of June 30 was 37% U.S. equity, 14% foreign equity, 14% in private equity, 13% bonds, 8% equity hedge funds, 8% real assets, 3% global inflation-protected securities, 2% real estate investment trusts and 1% in fixed-income hedge funds.
Mr. Branigan said in a Sept. 9 release that the endowment's value has increased 9.6% since 2007. Average annual net returns of 6.5% over 10 years and 8.8% over 20 years through June 30 “have allowed the endowment to maintain inflation-adjusted spending while achieving long-term intergenerational equity,” according to the release.