The bear market takes its toll

Ministers want universities to develop endowment funds. But what if shares slump, asks Joel Budd

Pension funds aren't he only things losing money these days. Three years into the worst stock market slide for a generation, the universities are also having a rough time of it. Falling share prices have wiped millions of pounds from their endowments, interest rate cuts have dented income, and the arid investment climate is crippling their commercial activities.

Even the wealthiest institutions are feeling sorry for themselves. "We haven't reached the point where we've got to have a word with the bank manager once a month about paying the wages bill," says one Oxbridge bursar. "But these are difficult times."

British universities used to sail through economic storms, largely unexposed to recessions and stock market crashes. But fundraising campaigns have provided many universities with the means to dabble in equity markets. Some have poured money into start-up companies and other commercial ventures. As the economy has faltered, virtually everything has lost value.

Oxford and Cambridge colleges are the worst affected. Both cities are expensive, with runaway property prices and low unemployment helping to drive up labour costs. To meet the huge costs of maintaining old buildings and keeping the tutorial system ticking over, the colleges rely heavily on their own resources.

New College gets about 40 per cent of its income from its endowment. As its warden, Alan Ryan, explains: "It costs almost £1m a year to keep a large 14th-century college going, and our endowment in effect pays for the historical monument side of the college, fills in the deficit on teaching costs, and allows us to give the students better accommodation than most universities can manage."

New College's shareholdings have shed millions of pounds in value over the past few years. This is not a calamity: unlike a pension fund, the college can afford to hold its shares until stock markets recover. But a larger problem looms in the shape of falling interest rates – and, in future perhaps, falling dividends. "In that case, life becomes very hard indeed," says Professor Ryan. "Our ability to function would be impaired if we got less than a 4 per cent return on the total endowment." Along with others, the college would have to defer maintenance, shed teaching staff, and take in more foreign students.

All Souls, one of Oxford's wealthiest colleges – and one that, having no undergraduates, depends entirely on its own resources – is also having a difficult time. The college's endowment, which was worth £140m in July 2000, had lost 12 per cent of its value by last December, and has presumably fallen further since then.

But it could be worse. What has saved All Souls and other ancient colleges from much deeper losses is the fact that up to half of their assets are in the form of property. As Tom Seaman, its college bursar, explains, "you wouldn't find any institutional investor in the world, except for an Oxbridge college, that has a distribution like that. Fortunately, though, property has done extremely well in the past few years."

Modern colleges and universities are also vulnerable to sudden shifts in equity values. Nearly all depend on investments to keep some part of their operations going, although they aren't so dependent on their savings as the ancient colleges. The University of Strathclyde uses its £16m endowment to support an entrepreneurship centre and 16 endowed chairs and lectureships. It invests in a range of companies – "good, conservative Scottish stuff", according to Dr. Peter West, the university secretary.

To find the universities worst affected by the economic malaise, though, you have to look to America. There, money is draining at an alarming rate. Between June 2001 and June 2002, US institutions saw their endowments decline by more than $9bn. Harvard lost $781m while running the best fundraising operation in the world. As the situation continues to deteriorate, an increasing number of universities (including rich ones like Stanford) are enacting pay and hiring freezes.

Of course, American universities have lost more because they had more to begin with. A recent report by the Sutton Trust shows that, even after losses have been taken into account, US endowments far exceed those to be found in Britain. Edinburgh University, which has £160m in reserve – more than any other UK university, except Oxford and Cambridge – would rank 150th in an American league table.

American institutions built their fortunes over several decades, largely by shaking down alumni. It's something that British universities are trying to emulate, with mixed results so far. January's education White Paper expressed hope that British universities would soon be able to build hefty endowments. The profits from these investments could be spent raising academic salaries, buying linear accelerators, or helping impoverished students – anything the university wanted. It would help to set institutions free of government funding strictures.

No vice-chancellor would disagree. But there is a problem with relying on the income from endowments. Their value can be even less predictable than the income from government sources and that is saying something. Having money to invest is better than not having money, and universities are wise to invest in equities, long-term. Yet they will have to get used to the experience of boom and bust. It won't be easy. As one bursar says: "it's extremely difficult to trim your sails just because financial markets are in decline. That's not the way people within institutions think."

education@independent.co.uk