With the stock market performing well in the last year, it's no surprise that universities across the country have reported strong endowment growth. According to a survey in The Chronicle of Higher Education, the average endowment return was 15.1 percent in 2004, in contrast to the dot-com bust that caused colleges to cut programs and suspend building campaigns.

Where did Carnegie Mellon fit into this average? With a return of 20 percent, Carnegie Mellon found itself a cut above the rest.

The endowment is a university's investment savings account. This money is not restricted, and can therefore go where it is needed most. Current students and faculty use it for annual operations, which John Mazur, the University's treasurer and chief investment officer, calls "the draw." One goal of the treasury and investment office is to ensure the existence of the endowment for future generations, a principle otherwise known as intergenerational equity.

This can often be a balancing act, trying to preserve the purchasing power of that set of assets in the future so the University can continue to grow. So far this year, the endowment is up 7.5 percent though Mazur says the treasury doesn't like to focus on short term statistics. Carnegie Mellon's endowment was just under $850 million in December, which is far below the value of HarvardUniversity's $22 billion and YaleUniversity's $12 billion. Although Carnegie Mellon is striving to catch up with such competitors, Mazur says the University is more focused on making Carnegie Mellon the best school it can be within its resources. Despite this, the treasury is making efforts to grow the fund quickly.

How is this done? The treasury has attempted to put more in and take less out, as well as make the endowment grow more on its own. The University used to draw down 6 to 7 percent of the endowment each year, but the Trustees have since reduced it to 5 percent to preserve the endowment's strength. University Advancement is also soliciting more donations from alumni.

One point Mazur continually stressed was the importance of long term monetary achievements, instead of the short term gains or losses: "We have to overcome the tension between true long term objectives and short term distractions."

According to Mazur, people overreact to news of short term achievements, often losing sight of the long-term purpose of the investments. For this reason, Carnegie Mellon uses a 36-month trailing endowment return average in hopes of dampening the year to year changes and making sure the long-term goals end out above inflation. Last year's strong return caused the 36-month average to rise five percent.

In terms of getting the endowment to grow more on its own, the trustees have had to look at different asset classes. Carnegie Mellon favors the common asset classes such as fixed income and regular stocks instead of assets like government bonds which generally have lower returns. There is an equity risk premium with common asset classes, but the better rewards outweigh the possible losses. According to Mazur, it's a trade off: "We have to manage to control the volatility of funds as well as the long term growth." Over it's history, Carnegie Mellon has invested 80 percent in equities and only 20 percent in fixed-income bonds.

"We worry about volatility, but not as much as making [the endowment] grow," said Mazur.

Endowment investments are an ongoing process under constant review by the board of trustees. The University hires investment managers to oversee the actual investing. Currently, there are 40 to 50 managers in different investment classes.

Some institutions, notably the California Public Employees' Retirement System (CalPERS), have waged board room battles to make companies more socially responsible in the wake of the corporate scandals in the first half of the decade. Because of the current investing attitude, Carnegie Mellon does not follow and has never tried to follow social responsibility investment decisions. 

In explanation of this, Mazur stressed social investing's ability to handicap growth, especially since there isn't a clear-cut definition of "the right stocks" to invest in. Mazur emphasized that there are too many contentious points, and getting involved in those social issues will not meet current goals.

"If things are legal, then we don't care…We play to win," said Mazur.

In contrast to the strong endowment return, undergraduate tuition will raise only 3.26 percent for 2005.

This increase was approved by the board of trustees last week and is small compared to the increase of 5.0 percent in 2004 and 8.5 percent in 2003. This rise brings the cost of tuition to $31,650 for incoming students. Room and board will also increase by 4.49 percent and 4.0 percent, respectively, bringing the overall cost of attending Carnegie Mellon to $40,927. Students who entered prior to the fall of 2003 will pay only $31,185 for tuition on a laddered tuition system.

Significantly, the big rise in tuition in recent years hasn't deterred students from applying, as applications are up 15 percent to 15,436 applicants for the 1,360 spots for the first-year class.

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