Investment returns plunge for higher-ed endowments

Investments on endowments for U.S. colleges and universities lost 0.3 percent on average, net of fees, in the fiscal year ended June 30, 2012, a deep plunge from the average return of 19.2 percent a year earlier, a new report says.

Ten-year returns for fiscal 2012 totaled 6.2 percent, compared to 5.6 percent a year earlier, “suggesting that long-term performance for many institutions continues to improve, says the 2012 NACUBO-Commonfund Study of Endowments.

The biggest endowments, or those with assets over $1 billion, produced the highest return in fiscal 2012, or 0.8 percent, while the smallest, or those with assets under $25 million, produced the smallest return, 0.3 percent, says the study, which is based on data from 831 colleges and universities with $406.1 billion total endowment assets.

Three-year returns averaged 10.2 percent, while five-year returns averaged 1.1 percent, both net of fees, with endowments with assets over $1 billion generating the highest average returns over three, five and 10 years.

Among asset classes, fixed-income investments generated the highest return, 6.8 percent on average, while international equities produced the lowest return, a loss of 11.8 percent.

Domestic equities returned 2 percent, alternative strategies as a group returned 0.5 percent, and short-term equities, cash and other assets returned 0.2 percent.

“With the exception of periods such as the recent economic crisis, institutions with the largest endowments have reported the highest one-year returns,” says a joint statement by John D. Walda, president and CEO at NACUBO, and John S. Griswold, executive director at Commonfund Institute.

That trend was reflected in the data for fiscal 2012, as well as for the “trailing” periods that showed results for three, five and 10 years, they say.

They attribute that outperformance to “well diversified portfolio with an equity bias, the ability to make long-term commitments to less liquid strategies, access to top-tier investment managers, and greater resources, including larger staffs, leading-edge technology and experienced investment committees.”

The effective spending rate at participating institutions in fiscal 2012 was 4.2 percent, down from 4.6 percent a year earlier, with the largest institutions, or those with assets over $501 million, posting the highest effective spending rate, an average of 4.7  percent, and the smallest, or those with assets under $51 million posting average rates under 4 percent.

In fiscal 2012, 39 percent of institutions reported they received less in gifts than a year earlier, while 41 percent reported an increase.

The median total of new gifts was $2.2 million in fiscal 2012 and the average total of new gifts was $8 million, with institutions with assets over $1 billion posting the highest median and average gifts by far.

Among the 616 institutions that reported they carry debt, average total debt was $187.5 million on  June 30, 2012, down from $189 million a year earlier, while media debt grew to $56.7 million from $56.2 million.

Debt service as a share of the operating budget averaged 5.4 percent, essentially unchanged from a year earlier.

Institutions employed the equivalent of 1.6 full-time employees to manage their endowments, unchanged from a year earlier, with the largest endowments employing an average of 10.9 full-time employees and the smallest employing an average of 0.3 employees.

Eighty-two percent of institutions reported using an outside consultant, up 1 percentage point from a year earlier.

Seventy-one percent of institutions said they do not apply environmental, social and governance criteria to portfolio holdings, the same as a year earlier.

Of the 149 institutions that do use some of those investment criteria, 60.1 percent of their portfolio reflects the use of negative screens, with percent of those 149 institutions voting proxies consistent with their screening criteria and 72 percent reporting that screening is a formal institutional policy.

Todd Cohen

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