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Cash-starved universities got a huge boost in May, when the federal government made it far easier for wealthy Canadians to make donations to charities such as school endowment funds.

With up to $1-billion a year in gifts now expected to start flowing, and a healthy chunk of that change earmarked for universities, the question on campus is what to do with this pending good fortune.

In the last federal budget, the Conservatives bowed to a decade of lobbying by groups that included Canada's universities, and eliminated all capital gains tax on gifts of stock and other securities to charities. In the past, only 50 per cent of these gifts was deductible. “This change had an immediate impact, we see it every day in the gifts we're receiving,” says Susan Mullin, director of development at the York University Foundation.

Just half way through the year, and coming out of the usually slow summer months, Mullin says York fundraising has already pulled in 75 per cent of last year's total donations. Mullin said: “There are major donors across the country who have been waiting for this type of incentive so they can make their gift.”

The new rewards for philanthropy are expected to see more alumni follow the example of mining financier Seymour Schulich, who has funded programs in several schools; McMaster benefactor Michael DeGroote of Laidlaw school bus fame; the Desmarais family's support for University of Ottawa; and eBay billionaire Jeff Skoll, who has endowed positions at the University of Toronto. The priority attached to winning these gifts is reflected in that fact that at many schools, fundraisers are the highest-paid employees.

“Entrepreneurs who have created real wealth in this country want to make a difference, but they needed a way to donate stock to charities,” said Donald Johnson, retired vice-chairman of investment bank BMO Nesbitt Burns and a tireless proponent of philanthropic giving who has ties to the University of Western Ontario and University of Manitoba. He said: “At least 75 per cent of U.S university funds come from gifts of stock or property. Almost no one can afford to make sizable donations out of their cash income.”

While the University of Toronto's $1.6-billion sets it apart from the herd — no other Canadian school's fundraising has broken through the billion-dollar mark — it doesn't own the title to the most endowment bucks for its size. That goes to Mount Allison University, which has about 2,000 students. If the amount of the school's endowment fund is measured as a percentage of its annual operating budget, the New Brunswick school comes out on top. With a fund of $79.6-million dollars, Mount Allison has $2.40 of endowment money to spend for each dollar of its operating budget. Meanwhile, U of T has $1.80 of endowments for each dollar in its operating budget.

So, how did tiny Mount Allison raise so much cash? A $5-million gift from alumni Wallace and Margaret McCain of French fry fame certainly helped. But Mount Allison credits its strong finances to tireless arm-twisting of every graduate. In the past year, the school has launched campaigns that targeted individual graduates in Bermuda, Calgary, Halifax, Moncton and Toronto.

“We're very aggressive in keeping in touch with alumni, with a particular emphasis on face-to-face meetings,” said Carol Heaslip, senior development officer at Mount Allison. Preparing for a one-day trip to Toronto where she would sit down with six potential donors, then fly home the same day, Heaslip explained: “We do extremely well on named scholarships, where the minimum gift is $25,000, and many of those are gifts of stock.”

Endowments are generally doled out in scholarships and other forms of student assistance. At Mount Allison, for example, half of all first-year students enjoy some sort of scholarship. The money handed out each year, typically about five per cent of the whole pie, also provides for new positions for professors and research chairs, and funds special programs or initiatives such as new buildings.

The road forward seems clear. Canadian university endowment funds are expected to start looking and acting like their larger U.S. peers. The biggest funds, at Harvard and Yale, represent some of the largest and most sophisticated pools of capital on the planet. Harvard alone has more than $29-billion (U.S.) Invested wisely, these funds are growing at a double-digit annual clip.

Here at home, there was a total of $7.9-billion in 72 Canadian university endowment funds at the end of 2004, according to the most recent statistics from the Canadian Association of University Business Officers, or CAUBO. The gap between the big players and the rest of the pack is enormous. Where the U of T has set aside $1.6-billion, the median fund at a Canadian university has assets of just $26-million. As these portfolios grow, and they will, university staff face rising expectations from both school administrators and alumni. “There's a heightened level of accountability at the schools, as we know we owe a duty to our donors,” says York's Mullin, who oversees a $200-million foundation. She added with a smile: “This is a hardship we're glad to shoulder.”

At a CAUBO conference in June, just after the budget announcement, CPP Investment Board executive John Ilkiw was asked to sketch out what he sees coming for university finance executives. The CPP has gone through growing pains of its own as it was spun out by the federal government — big Nortel losses were one sore spot. Ilkiw said the brave new world of university investing will feature more scrutiny from all sides, including alumni and media.

University endowments also have short time horizons on their investments, which leaves them more exposed to the whims of the market. And even if more money does flood in, these are still relatively small funds. Overlying all these challenges is the constant fear of losing money that the schools have been charged with safeguarding.

Endowment funds will need to move past traditional investing and embrace cutting-edge investment strategies in order to mitigate risks, and keep alumni happy and the donations flowing. The top performing fund at Yale, for example, allocated about 25 per cent of the endowment to hedge funds; 25 per cent to assets including real estate, timber and energy; and 17 per cent to private equity. Only a third of the fund was in old-fashioned stocks and bonds.

“It appears [Canadian] investment committees for the larger endowment funds are making greater allocations to alternative assets in anticipation of lower future market returns in public markets,” concluded a study last year by University Manager magazine. Over the past decade, CAUBO figures show the universities' funds boasted 9.4 per cent in annual returns, while the S&P/TSX equity benchmark was up 10.1 per cent and domestic bonds rose nine per cent.

Ilkiw said experience at CPP, one of the country's largest funds with $98-billion in assets, has shown how difficult it can be to actually implement cutting-edges strategies. With relatively small amounts to invest, the schools will struggle to get the attention of top money managers, and Ilkiw says: “Successful programs [in hedge funds and private equity] require access to the best funds over successive vintage years.”