Endowments of U.S. colleges and universities returned an average 19.2 percent on investments from July 1, 2010 through June 30, 2011, blowing by the 11.9 percent return of the prior matching 12-month period.

Investment returns were still less than the average inflation-adjusted spending rates of educational institutions, however, indicating that the damage inflicted by the downturn is still being felt at some schools.

For the 823 U.S. colleges and universities surveyed for 2011 NACUBO-Commonfund Study of Endowments it is a continuation of the recovery from the negative 18.7 percent return reported for FY2009, when the financial crisis and accompanying slide in equity markets negatively affected educational endowments.

NACUBO is The National Association of College and University Business Officers, based in Washington, D.C. Commonfund, based in Wilton, Conn., is an institutional investment firm within both the nonprofit and pension investment communities that manages $24 billion in assets.

The average annual three-year return for participating institutions was 3.1 percent, a rebound from the FY2010 three-year return of negative 4.2 percent. The corresponding five-year return figure was 4.7 percent, up from 3 percent in FY2010, while the average annual return over 10 years increased to 5.6 percent from 3.4 percent a year ago.

Respondents reported positive average returns for all asset classes this year, including private equity real estate (non-campus), which was the only strategy to report a negative return for FY2010. As was true last year, the highest return was from domestic equities, which gained 30.1 percent, nearly doubling FY2010’s 15.6 percent return. This was followed by international equities, which generated a 27.2 percent return; the broad group of alternative strategies at 14.1 percent; fixed income at 6.5 percent; and short-term securities/cash at 0.5 percent.

Within the alternative strategies category, the highest returns were from commodities and managed futures (26 percent), energy and natural resources (23.5 percent) and venture capital (21.7 percent). Marketable alternatives -- a category that includes hedge funds, absolute return, market neutral, long/short, 130/30, event-driven strategies and derivatives -- returned 9.4 percent, little changed from last year’s 9.9 percent return. Private equity returned 18.7 percent and distressed debt returned 14.5 percent.

Study data are divided into six categories according to size of endowment, ranging from institutions with endowment assets less than $25 million to those with assets in excess of $1 billion. In past studies, larger endowments have tended to significantly outperform smaller ones. Last year, however, the return spread across the six size cohorts was tightly compressed, at just 60 basis points from highest return to lowest. This year the spread expanded to a range of 250 basis points. As was true last year, the highest average return, 20.1 percent, came from institutions with assets over $1 billion while the lowest, 17.6 percent, came from those with assets under $25 million.

Performance figures during longer periods show the effect on portfolios of the 2008-09 market collapse and the subsequent recovery. Smaller institutions reported higher returns over three years, reflecting their better relative performance in FY2009 when they were buffered by their higher allocations to fixed income and lower allocations to alternative strategies.

Over a five-year period, a transitional pattern can be observed as long-term allocations by larger institutions to other, less-liquid asset classes enhanced returns and dampened volatility. Here, the best performance came at opposite ends of the size spectrum: an average of 5.4 percent annually from highly-diversified institutions with assets over $1 billion and an annual average of 5.2 percent from more traditionally- allocated institutions with assets below $25 million. Annual returns for the other four size cohorts all fell into the 4.4 to 4.8 percent range over the five-year period.

Over 10 years, the advantages of size and diversification were again seen to reassert themselves, with the largest endowments reporting an average annual return of 6.9 percent, followed by the next-largest size cohort, institutions with assets between $501 million and $1 billion, reporting an average annual return of 6.0 percent. Across the six groups, size and return were correlated—the larger the asset pool, the higher the 10-year average annual return.

The NCSE for FY2011 reports and analyzes return data and a broad range of related information reported by 823 U.S. colleges and universities, both public and private, as well as their supporting foundations. The size and scope of the study make it the most comprehensive annual report on the investment management and governance practices and policies of institutions of higher education across the U.S. Participating institutions represented $408.1 billion in endowment assets. Of the 823 institutions to take part in this year’s Study, 97 percent participated in last year’s NCSE.

Share this story

Story tools