From the Chief Financial Officer
Greetings from the finance, facilities, and operations teams at Lawrenceville. We are pleased to report that fiscal year 2012-13 was full of forward motion for our great School. Our endowment grew ahead of our draw for operations plus inflation; we generated a surplus over our operating budget; and we made significant repairs and renovations to our campus infrastructure and buildings.
Although we appreciate these fair winds, our perennial challenges remain. As a philanthropy, we intentionally charge less for our product than its cost; the financial gap we create needs filling by donors from our global community; and, as an enterprise of people, buildings and grounds, our costs inevitably rise faster than inflation, in spite of solid financial discipline. While balancing these tensions, we are also seeking to strengthen our School financially to reduce the gap between ourselves and our better-funded peers and to add protection against cyclical spasms in financial markets and the seeming increase in tortious claims made against schools.
All-in-all, it’s a challenging mix that we address with love for Lawrenceville, and we thank with all sincerity our alumni, parents, and friends who make success here possible.
Years when financial markets are strong are generally good financial years for Lawrenceville. Our endowment earns enough to cover our annual draw for operations or more; more parents are able to afford private education of our extraordinary caliber; and donors are better able to support us as a philanthropic priority. The year 2012-13 was such a year, in spite of the significant uncertainty that remained about the true condition of global economies.
As a result, we are very pleased to report that the School’s endowment as of June 30 reached its highest-ever year-end tally. The total endowment increased during the last fiscal year to $338.3 million from $314.8 million, largely as a result of a strong investment performance which generated an 11.1% return on our managed assets. In addition, the School benefited from the proceeds of pledges made during the recent capital campaign as well as the continuing generosity of alumni, parents and friends.
Based on our formula for withdrawing funds from the endowment, which, for the operating budget is essentially 5% of the average value of the portfolio over a three-year period, the endowment contributed $14.1 million, or 23% of the budget, in the year just ended. In the 2013-2014 year, we expect that contribution to rise to $14.9 million.
The Investment Committee of the Board of Trustees, chaired by Michael S. Chae ’86, membered by four additional trustees and advised by our retired CFO, Bill Bardel ’57, has generally followed the same intention we have discussed in the past: to create a so-called “all weather” portfolio, generating strong long-term returns with lower volatility. While such an approach may lag public market indices in strongly positive years, such as the last year, it will provide substantial protection in weak markets through diversification, sound asset allocation, and high-quality manager selection. The benefits of this approach can be seen over the last five years, during which the Lawrenceville portfolio outperformed the All-Country World Index by 120 basis points, with less than half the risk as measured by the annualized standard deviation.
The overall investment goal of the committee is to achieve, over time, at least a 5% real return, thus keeping up with spending and inflation. Over the past 10 years, the portfolio has averaged nominal returns of 8.1% per annum and real (i.e., net of inflation) returns of 5.7 %, so we have achieved our goal during this extremely volatile period. Based on data from Cambridge Associates concerning peer schools, we have ranked in the top portion of our peer group over one, three and five-year periods.
As of June 30, our funds were allocated in the following ways to our basic asset classes:
In the course of the year, this represents measured increases in allocations to long-only, hedged, and absolute return exposures, while reductions occurred in private equity (largely resulting from substantial distributions), real assets, fixed income and cash.
In the past year, we have had strong performance from each of our long-only equity sectors, with an overall return of 19.2%. This includes particularly good returns from our non-U.S. managers who beat their benchmarks by substantial margins. Developed-country managers such as Silchester International Value, which has outperformed its index by an average of 800 basis points over five years, and Lone Cascade, one of the Lone Pine Capital funds, which returned 26.1% for the year, contributed meaningfully to our success, as did Asian focused managers, such as Overlook Partners, with a 29.4% return, while Discovery Global Opportunity Fund, with a major exposure to Japan, was up by 33.8%.
Our hedged equity, absolute return and private equity allocations were also strongly positive for the year, all exceeding their benchmarks, but, in a diversified portfolio, there is almost always some category which didn’t work as well as hoped-for. In 2013, for us, that was the allocation to real assets, including commodities investments, though for the prior extended period this area had been a significant outperformer in our portfolio. We have reduced our allocation in this area, along with fixed income, and have shortened the duration of the remaining high-quality bonds which we hold.
Looking to the year ahead, we will be making incremental adjustments to our portfolio, but it is unlikely that we will have major shifts in our planning. In a complex global investment environment, we will continue to look to diversification, thoughtful asset allocation, and identification of outstanding managers to drive the long-term growth of the endowment resources of the School.
The School managed to a $51.2 million cash operating budget in FY 2012-13, which amounted to a cash cost per student of roughly $63,000, or $75,000 if our $10.1 million investment in Financial Aid is counted as an expense rather than as a discount to Tuition revenue. This budget represented a growth of 3.85% over the prior year’s budget, an increase necessitated mainly by inflation’s effect on people and plant costs and secondarily by investments in our various programs.
Funding for this growth came primarily from an average increase in tuition of 4.8%, which was supported by a record 7.1 applicants for each place at Lawrenceville, and a 4.75% draw for operations on our growing endowment. Although the combined growth of The Lawrenceville Fund and The Lawrenceville Parents Fund was flat for the year, our annual fund donors covered a vital 10.4% of our budgeted costs.
Debt amortization and the last phase of our infrastructure repair program made a supplemental draw on our endowment necessary, of $6.1 million, which added 1.9% to our draw for operations and resulted in an unsustainable total draw rate of 6.7%. The completion of our infrastructure program this summer should enable us to keep our total draw rate lower than the average growth of our endowment less inflation. Meanwhile, significant new gifts to our endowment added life to our International Student Travel program, to the activities of the Stephan Archives, and to Financial Aid.
We closed the year with a surplus of roughly $1.3 million. Various unrelated factors led several programs to underspend their budgets, and we also benefited from the favorable refinancing of $49.1 million of our $56 million in debt. We are saving much of the surplus to strengthen our reserves.
Beyond finance, we are renewing our commitment to risk management not only because it is our duty to do so but also because of a rise in tortious claims against charitable institutions, a sector that used to be treated differently by society. Educating adolescents in 24/7 residential settings is not a risk-free activity by nature, and, while Lawrenceville has steered clear of trouble thus far, a large verdict against a peer school, although under appeal, is sending shock-waves through our community. We are confident that our own operations are less risky than ever, but there is always more to do, yet we are also wary of the dampening effect that increasing litigation could have on our art, and we will look for balance as we proceed.
As the fiscal year drew to a close, the School was completing several major capital projects that have severely disrupted our campus but for very good reasons:
A jewel in our crown, the Fathers Building, has been restored to classical beauty and effectiveness some 70 years after its last makeover. Our donors also helped us extend the renovation to two unrealized spaces: we converted “Pop’s” dark basement to a light- and glass-filled technology center for student use, and we remodeled the space between Pop and Woods Mem Hall into a courtyard centered with a Harkness-shaped terrace, all with wonderful results for the School that promise to be enduring.
With great relief, the six-summer, $25 million program to replace and upgrade failing campus infrastructure has drawn to a close. Triggering this project was the 2006 failure of a main branch of our central heating system, which carries low-pressure steam from a central plant to our core buildings and Houses. With trenches opening across campus summer after summer, we added projects to replace our freshwater distribution system and to clear flooding storm water. Aging slate roofs were also replaced as were two of the bridges over our creek. Throughout, we took the opportunity to beautify as we proceeded, with the net result that we are looking and operating like the world-class school we are.
And, as a sign that we are dedicated to preventing deferred maintenance from accumulating again, we continued our process started last summer to take a House or two offline each summer for a thorough renovation and upgrade. This summer was Cleve’s turn.
Looking to the future, we have some exciting projects in development, but they are within the framework of “repair/replace” rather than “expand.” We believe that the physical plant we have is nearly optimal for our mission and that repairs and upgrades on the Pop Hall model are the best way for Lawrenceville to balance the needs of plant and purpose. Having now renovated most of our major Houses, classroom buildings, and facilities, only a few remain that will draw our attention in the coming years.
Now starting my eighth year at Lawrenceville since I graduated in 1971, I remain delighted to be here and to work with such talented and devoted colleagues and with such an exceptional Board. The complexity and challenges of what seemed a straight-forward enterprise from my prior perspective as a banker continue to humble and excite me. There is always challenging and rewarding work to do here at our great school, and we could not do it without the devotion and support of our extended community. Thanks to all who send us their children, who support us financially, and who carry our reputation for excellence forward. Here’s to a great school year in 2013-14.
Wesley Brooks ’71 P’03 ’05
Chief Financial & Operating Officer