Wall Street

Bad Investment cause endowment loss

Date 10/28/1999 12:00 AM | Topic: News

Luther College's endowment experienced a $9 million loss in the third quarter of 1998, due to a costly drop in the value of some high-risk stocks in which the college invested. But equally costly has been the Luther College endowment's below average growth over the past ten years despite the booming stock market of the 1990's.

Luther's slow endowment growth represents that Luther students pay for more education, but are offered less.

Luther's investment growth was an issue even before the 1998 loss. "The law of averages says that sometimes you'll be on top and sometimes you'll be on the bottom," said David J. Roslien, vice president for college advancement.

"When investing one shouldn't expect to out-earn everyone."

However, Luther College has had little success proving this law of averages.

According to figures reported in The Chronicle of Higher Education, from 1995-1998 Luther College failed to match the national average for endowment growth over the four year period.

In the past the college has tried to remedy investing problems by using different investment methods.

According to John Noel, comptroller for Luther College, Luther used two other investment techniques before arriving at their current one.

"Initially we were with Investment Advisors Incorporated but, after their predictions proved to be too conservative for our needs. The Regents decided to try choosing mutual funds on their own," said Noel. "However, this proved unsatisfactory, so we chose to go with Hammond and Associates of St. Louis."

Unlike Luther's previous investment methods, where the college received advice from people who also invested the money, Hammond and Associates only gives the college advice on Luther's investments..

Hammond and Associates was advising Luther when money from Luther's endowment was invested in emerging market debt.

Emerging market debt investing means buying bonds from countries like Mexico, Brazil, Malaysia, and Russia, all markets which have crashed in recent years, a factor in Luther's $9 million loss in 1998.

A 1997 article in The Chronicle of Higher Education detailed this investment practice, deeming it morally and ethically questionable, lucrative, and yet very volatile.

After 1998's loss, Luther College pulled its money out of these investments, but remained with Hammond and Associates.

"We are confident in our investment plan," said Noel. "After all, this is a learning process."

Yet, if Luther's investment plan proves ineffective, the consequences could mean more than money lost.

Because Luther covers 80% of its operating costs with student fees, it can only offer classes where enrollment is high enough to cover the cost of offering it.

Without endowment to cover more of the costs, programs like Russian Studies, that have lower enrollments, will become harder and harder to fund.

"We can't compete with schools with larger endowments," said Roslien.

"They have much more freedom to choose than someone in our position." said Roslien.

The growth of Luther's endowment is vital not only in limiting the comprehensive fee, but it is also vital in helping the college fulfill its academic mission.

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Nathan Gerth
Chips Staff Writer

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