Duke’s asset values plunge in ‘challenging’ market

Duke University’s bottom line took a $1 billion hit in fiscal 2015-16, thanks in part to a 2.6 percent loss in its long-term investment pool, according to its annual financial report.

The university and its affiliated medical system nonetheless ended the year with nearly $12 billion in net assets, and from an operations standpoint ran $212.1 million in the black.

But Duke, investment-wise, wasn’t immune from the pressures of what Jonathon King, the chief fund manager for nearby UNC-Chapel Hill, has termed the “Alice in Wonderland environment” of the world’s financial markets.

Duke Executive Vice President Tallman Trask deployed a somewhat less colorful adjective – “challenging” – to describe a market that was tough on major college endowments generally.

It illustrates that campus leaders have to assume they face “financial limitations that require tradeoffs and priority-setting (to) achieve our most important aspirations,” Trask said in his preface to Duke’s fiscal 2015-16 report.

His words lined up with a warning the in-house University Priorities Committee relayed to faculty leaders earlier in the year, when it said investment returns over the next three to five years could well fall behind the levels Duke baked into its budget modeling.

And Duke and UNC – King’s fund incurred a 2 percent loss – were hardly the only major universities to have a bad year in the market. Nationally, schools including Harvard and the University of Pennsylvania joined them in seeing losses.

It was a year that punished institutions that put their money into anything other than traditional U.S. stocks and bonds, King said last summer as accountants were still totaling up the damage.

On the ground at Duke, though, 2015-16 was a good year for many people. Combined, the university and its affiliated health system paid out $2.3 billion in salaries and wages, up about 5 percent from fiscal 2014-15.

On the university side of the house, the increase was driven mainly by “merit-based salary increases for faculty and staff.” On the health-system side, there were likewise “planned increases in annual pay rates” but also broader growth in the volume of business.

All told, Duke and the Duke University Health System raked in about $5.7 billion in revenue and spent about $5.5 billion on operations.

Tuition and student fees accounted for about $455.8 million of revenue, after discounts related to financial aid, scholarships and other factors. Grants for research and other work brought in another $1.1 billion. Patient care accounted for nearly $3 billion.

As it did in 2014-15, the health system helped subsidize Duke’s medical school, transferring about $98 million to it for operations and another $510 million for long-term funding.

The system also supplied about $82 million in charity care, an increase of $12 million or 17 percent on last year’s level.

Hiring-wise, Duke employed more professors in 2015-16 than it did the year before, but the gains were all off the tenure track. As of June 30, it had 63 more non-tenure-track faculty than in 2014-15, and 26 fewer tenured or tenure-eligible professors. All told, it had 3,427 faculty members.

Duke’s non-faculty staff grew by 998, or 2.2 percent, to 45,898 in the university and the health system. Campus leaders such as Duke President Richard Brodhead are fond of noting that the Durham institution is North Carolina’s second-largest private-sector employer, behind Walmart.

But the investment loss shadows the report because Duke’s long-range financial planning assumes it needs to generate a return of about 7.5 percent a year, not counting inflation.

Fund managers had bettered that in recent years, but 2015-16 saw a give-back of a portion of those gains. The university’s endowment – the intended beneficiary of a majority of Duke’s investments – shrank in value to $6.8 billion, down 6.3 percent from $7.3 billion the year before.

Trustees held to policy in approving $364.3 million in spending from the endowment, even as its market value was dropping by about $229.8 million, according to the report.

This story was originally published December 28, 2016 at 1:12 PM with the headline "Duke’s asset values plunge in ‘challenging’ market."