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Education Endowments Flunk, Posting Negative Numbers

By Patrick Sullivan - October 25, 2012

Rates of return for college and university endowments have taken a nosedive in fiscal year 2012. The rate of return is a negative 0.3 percent, compared to a 19.2 percent gain for 2011. That’s according to preliminary results of a study by Commonfund Institute and the National Association of College and University Business Officers (NACUBO) on higher education endowments.

Data has been collected from 463 U.S. institutions, with more than 800 expected to participate by the time final results are released in January 2013.

“The financial markets have been pretty volatile so it wasn’t a surprise (rates) were lower than last year, but it was a surprise that they were negative,” said Ken Redd, director of research and policy analysis for NACUBO, based in Washington, D.C.

“The fiscal year closes on June 30, and last spring and early summer there was upheaval over Greece and the European economy slowing. That really weighed on endowments which invested in foreign securities,” he said.

The endowments overall did not track with the U.S. financial markets. During the period examined for the study, July 5, 2011 though June 29 of this year, the Dow Industrial Average was up 2.4 percent and the NASDAQ was up 3.86.

The institutions were broken into six endowment size categories, from those with endowment assets less than $25 million to those with more than $1 billion. It is these largest and smallest categories that have so far shown the best returns, with an average of 1.2 percent for those in the largest category and 0.2 percent in the smallest category. Endowments with assets between $501 million and $1 billion also showed positive returns at 0.1 percent.

Endowments in the three middle categories — between $25 million and $50 million, between $51 million and $100 million, and between $101 million and $500 million — all showed negative returns, at -0.8 percent, -1.0 percent and -0.5 percent, respectively.

John Griswold, executive director of the Wilton, Conn.-based Commonfund Institute and John Walda, president and CEO of NACUBO called the spread in return from highest to lowest between the endowment categories “unusually tight” at 220 basis points. Preliminary findings in last year’s study showed an even tighter spread at 180 basis points. “In normal markets there’s a much bigger difference,” said Redd. “Usually we see that difference is four or five percentage points (400 or 500 basis points). It reflects the volatility in the market.”

Asset allocation varied widely, but patterns emerged. Endowments with larger assets showed less investment in domestic equities, fixed income allocations and short-term securities and cash. They had a higher rate of allocation to alternative strategies, which include hedge funds, derivatives, private capital and private equity real estate. Redd said that more investment in domestic equity by the smaller endowments and more investment in the alternative asset classes by the larger endowments contributed to their higher rates of return.

A smaller sample of 215 institutions provided additional data. In that sample, 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. Endowments with assets over $1 billion and those with assets between $501 million and $1 billion tied for the highest average three-year return, and endowments over $1 billion had the highest five- and 10-year returns.

The average spending rate of the 215 institutions was 3.9 percent, compared to 4.6 percent in 2011. The two smallest size categories spent at 3.6 percent and 3.3 percent, while the other four categories reported spending rates of 4.1 percent or higher. Total gifts in that sample averaged $5.8 million and median total gifts was $2 million. Both average and mean gifts shrank as the size categories became smaller, with the highest going to those endowments over $1 billion and the lowest to those under $25 million.

Redd said the final numbers are unlikely to change a great deal, though he and Griswold both said they expected the spending rate to rise slightly. “Statistically speaking, we have a viable sample,” said Redd. “It would surprise me if the numbers turn positive. We’re expecting between zero and a -1 or -2 percent return” when the final report is released next January.


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