Education endowments rebound

Endowments at U.S. colleges and universities posted investment returns averaging 11.7 percent, net of fees, in the fiscal year ended June 30, 2013, marking a strong recovery from losses averaging 0.3 percent a year earlier, a new study says.

Among 835 U.S. colleges and universities that provided data for the 2013 NACUBO-Commonfund Study of Endowments, with endowment assets totaling $448.6 billion, the portion of their operating budget funded by their endowment averaged 8.8 percent.

That ranged from of a high of 16.2 percent for schools with assets over $1 billion to a low of 2.5 percent for schools with assets under $25 billion.

Domestic equities generated the highest average return in fiscal 2013, at 20.6 percent, net of fees, followed by international equities, at 14.6 percent; alternative strategies, 8.3 percent; fixed income, 1.7 percent; and short term securities, cash and other, 1.2 percent.

Three-year returns for participating schools averaged 10.2 percent, while five-year returns averaged 4 percent, and 10-year returns averaged 7.1 percent.

Endowments with assets under $25 million reported the highest average three-year and five-year returns, at 10.6 percent and 4.9 percent, respectively, while those with assets over $1 billion generated the highest average 10-year return, at 8.3 percent.

“This year’s investment results reflect in large measure the strength in publicly traded equities that has prevailed since early 2009,” John Griswold, executive director at Commonfund Institute, says in a statement.

While larger endowments performed better over a 10-year period, smaller endowments with higher allocations to domestic equities have performed well in the shorter term, he says.

Asset allocations remained stable, with participating schools allocating 53 percent of their portfolios to alternative strategies, compared to 54 percent a year earlier.

Alternative strategies include marketable alternatives such as hedge funds; private capital; distressed debt; and private equity real estate.

The effective spending rate for the 835 schools averaged 4.4 percent, up from 4.2 percent a year ago.

Schools with assets over $1 billion reported the highest spending rate, 4.8 percent, while schools with assets under $25 million reported a spending rate of 4.1 percent.

Fifty-one percent of schools reported an increase in gifts while 30 percent reported a decrease.

Among those reporting an increase, the median increase was 55.8 percent, and among those reporting a decrease, the median decrease was 33.9 percent.

The median total of new gifts to endowment was $2.3 million, and the the average gift was $9.4 million, up from $8 million a year earlier.

John D. Walda, president and CEO at NACUBO, says in a statement that, despite the improvements in investment returns over the past year, colleges and universities “are in a period of rethinking their budget-setting strategies and priorities.”

The past 10 years of volatile financial markets and deep cuts in government funding for higher education, as well as declines in enrollment and tuition revenue at some schools, he says, provide a context for the strong endowment performance in fiscal 2013 that reflects “continuing stress on tuition, state government appropriations and other revenue sources.”

Among 638 schools that reported they carry debt, average total debt was $204.3 million on June 30, 2013, up from $187.5 million a year earlier, while median debt was $56.3 million, down from $56.7 million a year earlier.

Thirty-one percent of study participants reported their schools increased the level of debt in fiscal 2013, while 62 percent reported a decrease.

Endowments reported they employed the equivalent of 1.6 full-time staff devoted to investment management, unchanged from the previous year.

Fifty percent of participating schools reported they employ risk limits in their portfolios, while 28 percent do not.

And 18 percent of participating schools reported they apply environmental, social or governance criteria, or ESG policy, to portfolio holdings.

Among the 157 schools with some form of ESG policy, 58.6 percent of their portfolio reflects the use of negative screens, 47 percent vote proxies consistent with their ESG criteria, and 70 percent say ESG investing is a formal institutional policy.

Todd Cohen

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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