Endowments Continue Their Rollercoaster Ride

Lynn Russo Whylly's picture

2012 was not the best year for higher ed endowments, which ended FY2012 at -0.3 percent, compared to a 19.2 percent growth the prior year, according to the 2012 NACUBO-Commonfund Study of Endowments.

Long-term performance—over the 10 years ending FY2012—continued to improve at a 6.2 percent average return, compared to the same 10-year-period ending FY2011, which finished at 5.6 percent. The combined endowments also outperformed the S&P 500 10-year return at 5.3 percent. When accounting for inflation and spending, however, “an average university has grown about 3.8 percent per year,” said Verne Sedlacek, president and CEO of Commondfund Institute, at the January 31 press conference announcing the results of the report.

Of 831 study participants, those with more than $1 billion in the coffers produced the highest average return, at 0.8 percent. “The size of the endowment has a lot to do with performance,” Sedlacek said.

However, “Universities have lost ground when you adjust for inflation,” said Commonfund Executive Director John S. Griswold at the press conference. “That’s an important point to get across,” he says, noting that universities are still not where they need to be since the stock market crash of 2008.

Over the years, with the exception of periods such as the recent economic crisis, institutions with the largest endowments have reported the highest one-year returns, the companies report. This trend can again be seen in this year’s data, as well as for trailing periods. “We attribute this outperformance to a number of factors,” said Griswold: “well-diversified portfolios 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.”

Endowments between $501 million and $1 billion showed an 0.4 percent average return, while all three mid-sized cohorts, ranging from $25 million to $500 million, declined. Of the three, the lowest return was -0.1 percent among institutions with assets between $51 and $100 million.

“Schools are very diverse and their diversity has something to do with the differences you see in the results,” said Griswold. He notes that total assets reached $407 billion, with the average at $290.4 million and the median at $186 million.

Asset Classes
The most productive asset class was fixed income investments, according to the results of the study, which helped both large and small endowments, while endowments with assets over $1 billion reported the highest return from this category, despite having the smallest allocation. “My guess is they had longer duration bonds in their portfolio,” Sedlacek said. “Long-term daily treasuries were up 6 percent, so the longer you were in treasuries the better the return was.”

Conversely, endowments with assets under $25 million benefited most from the largest fixed income allocation, at 29 percent, despite reporting the lowest return, of 6.1 percent.

Hedge funds underperformed the most in 2012 compared to other categories. “Hedge funds were surprisingly disappointing for those who have allocations there and it continues to be a growing concern as to whether hedge funds can continue to perform to meet expectations.”

Returns on venture capital, on the other hand, he says, are picking up after 10 years of flat returns due, in part, to IPOs from companies including Facebook, LinkedIn.

International equity allocations reported weak returns, reflecting the ongoing turmoil in Europe and fears of economic challenges in China, as well as several emerging countries, Sedlacek said. All six size cohorts reported negative returns ranging from -13.2 percent to -10.5 percent.

Long-term vs. Short-Term
The long-term trend of increasing allocations in alternative investment strategies continued from last year, the study sponsors report, including increases in private equity; marketable alternatives (which include hedge funds); venture capital, private equity real estate; energy and natural resources, and distressed debt. Allocations in alternatives were correlated by endowment size, with the largest endowment classes (+$1 billion) reporting a 61 percent allocation to alternatives, while those at the smallest end (<$25 million) reported an average allocation in the asset class of just 11 percent.

At the opposite end of the spectrum, and also a continuing trend, allocations to short-term securities/cash/other were smallest among endowments with assets over $1 billion, and largest at the lower end.

The FY2012 spending rate reported for participating institutions was 4.2 percent, down from 4.6 percent in FY20122. Institutions in the two largest cohorts reported the highest effective spending rate at 4.7 percent, compared with 4.0 percent for the two smallest. The decline, the companies report, was due to the fact that most institutions use a three-year moving average of endowment market values to determine their spending. Endowment values increased sharply in FY2010 and FY2011, causing the effective spending rate to lag.

Study participants reported that an average of 8.7 percent of their operating budget is funded by their endowment, with universities with +$1 billion endowments using 16.2 percent, compared with institutions with less than $25 million using just 3.1 percent.

Generosity Mixed
Decreases in gifts and donations as a result of the economic crisis are a definite cause for concern, NACUBO and Commonfund report. In FY2012, 39 percent of institutions reported receiving fewer gift dollars than in the previous year, despite the fact that a full 41 percent reported receiving more. The median total of new gifts was $2.2 million, while the average was $8 million.

Among those institutions that carry debt, median debt rose slightly to $56.7 million from $56.2 million in FY2011. As a percentage of the operating budget, debt service was flat against last year, at 5.4 percent, as was the number of full-time employees used to manage endowments (1.6 FTEs). Also of note is that nearly three-quarters (71 percent) said they don’t apply environmental, social and governance criteria to their investment holdings. There is no change in this percentage from last year.

“The pressure is on for universities to obtain what they’ve lost in endowments from other sources while at the same time keeping tuition on hold,” Griswold said. On average, institutions in the study increased their spending by 7 percent year over year. “Most of those increases came in the larger size categories,” Sedlacek said. Spending by smaller institutions was flat.

Looking forward, Sedlacek said, “challenges for universities are significant, but we’re confident they will be able to address them. The ways to add to revenue are changing and I think when we look at expense control within a university system, that model is something that is going to be a key theme over the next 10 years.”