Investment returns surge at education endowments

Investment returns on endowments at 461 U.S. colleges and universities averaged 11.7 percent, net of fees, in the fiscal year ended June 30, a sharp reversal from the previous year, when returns on average lost 0.3 percent, new data show.

Among 206 schools that completed a survey for the 2013 NACUBO-Commonfund Study of Endowments, returns averaged 10.4 percent over three years, 4.3 percent over five years, and 7.1 percent over 10 years.

The average allocation to alternative investments fell to 47 percent of participating endowments’ portfolios from 54 percent a year earlier, according to preliminary data, showing a “pause in the long trend of growth in schools’ allocation to alternative investment strategies,” Commonfund and NACUBO say.

Offsetting that decline was an increase in allocations to publicly traded equities, with participating institutions’ average allocation to domestic equities growing to 20 percent from 15 percent, and their allocation to international equities growing to 19 percent from 16 percent.

The allocation to fixed income investments was unchanged at 11 percent, while the allocation to short-term securities, cash and other investments fell to 3 percent from 4 percent.

Among 206 institutions included in the preliminary data, the effective spending rate, or the amount of spending specified by the board from the investable assets, usually expressed as an annual percentage of the beginning market value of the fund, averaged 4.2 percent, unchanged from the previous year.

Half of participating schools reported an increase in gifts, while 30 percent reported a decrease in gifts.

Endowments reported an average of the equivalent of 1.2 full-time employees devoted to investment management, down from the equivalent of 1.6 full-time employees the previous year.

Some of that “marked decline,” the study says, may be the result of an increase in outsourcing.

Forty-two percent of study respondents said they had substantially outsourced the investment management function, up from 38 percent the previous year.

And 45 percent of participating schools say they employ risk limits in their portfolios, while 33 percent say they do not.

Todd Cohen

Higher-education endowments post loss

The return on investments for endowments at U.S. colleges and universities plunged in the fiscal year ended June 30 from the previous year and posted a loss, preliminary data show.

Endowments at 463 U.S. colleges and universities lost 0.3 percent on average, net of fees, in fiscal 2012, compared to an average return of 19.2 percent in fiscal 2011, according to preliminary data from the 2012 NACUBO-Commonfund Study of Endowments.

The largest and smallest endowments posted the best returns, while mid-range endowments reported losses.

Institutions with endowment assets over $1 billion reported the highest average returns of 1.2 percent, compared to 0.1 percent for those with assets from $501 million to $1 billion, and 0.2 percent for those with assets under $25 million.

Institutions with endowment assets from $51 million to $100 million lost 1 percent, compared to 0.8 percent for those with assets from $25 million to $50 million, and 0.5 percent for those with assets from $101 million to $500 million.

Returns for all institutions in the sample ranged from 15.8 percent to a loss of 9.5 percent.

Among a slightly smaller sample of 215 institutions, trailing three-year returns averaged 10.4 percent, trailing five-year returns averaged 1.5 percent, and trailing 10-year returns averaged 6.1 percent, all net of fees.

The data for fiscal 2012 and for the longer periods all “confirm the historic patterns of outperformance by larger institutions, chiefly those with assets in excess of $1 billion,” NACUBO and the Commonfund Institute say in a statement.

The pattern was interrupted in the financial crisis of 2007 to 2009, when smaller institutions tended to outperform as a result of their larger allocations to fixed income and shorter-term securities, they says.

Institutions with endowments of different sizes reported widely varying asset allocation, the data show.

Allocations to domestic equities average 10 percent for institutions with assets over $1 billion, for  example, compared to 37 percent for those with assets below $25 million.

The most significant trend in asset allocation for higher education over the past 10 years, the data show, has been growth in allocations to alternative strategies, particularly among larger institutions.

The effective spending rate in fiscal 2012 for 215 institutions reporting that data averaged a total of $5.8 million, while the median total for gifts was $2 million.

Both average and median gifts were highest, by far, among institutions with assets over $1 billion, with gifts correlating with the size of institutions, shrinking with smaller institutions.

Todd Cohen