Endowments Soaring On 10-Year Returns
January 30, 2015 Patrick Sullivan
Endowments for colleges and universities had a strong 2014 fiscal year, with an average return of 15.5 percent. That return beat out the 11.7 percent growth in return rate in 2013. Commonfund and the National Association of College and University Business Officers (NACUBO) released the 2014 Study of Endowments (NCSE) this week. The 832 institutions surveyed had a collective $516 billion in endowment assets as of June 30, 2014.
When it comes to endowments, “Size matters,” NACUBO President and CEO John Walda said during a press conference. “That’s particularly true over the long run.” The largest endowments, those more than $1 billion, had a 10-year return rate of 8.2 percent, compared to 6.6 percent for the smallest endowments, those less than $25 million. “That’s a significant difference,” said Walda.
Domestic equities had the highest rate of return, at 22.8 percent, better than 2013’s 20.6 percent. Other asset classes, while not as high, showed more dramatic increases compared to 2013. International equities returned 19.2 percent, up 4.6 percentage points over 2013. Fixed income had a return rate of 5.1 percent, a threefold increase from 1.7 percent in 2013. Cash and other assets including short-term securities and on-campus real estate showed the lowest rate of return and the slowest growth: 1.9 percent, compared to 1.2 percent in 2013.
Alternative strategies — including private equity, hedge funds and venture capital, among others — returned 12.7 percent, a 53 percent growth from 8.3 percent in 2012. Within alternative strategies, venture capital showed a return of 23.3 percent, up 281 percent from 2013’s return of 6.1 percent. Commodities and managed futures, which lost 6.1 percent in 2013, returned 7.9 percent a year later.
Asset allocations changed little between 2013 and 2014. Alternative strategies made up slightly more than half, or 51 percent, of endowment portfolios. Domestic and international equities were 17 percent and 19 percent, respectively. Fixed income was 9 percent of allocations, and short-term securities/cash/other was 4 percent.
“It’s a steady-as-she-goes strategy, partly driven by the fact it has worked well and there isn’t a good alternative out there,” said John Griswold, executive director of the Commonfund Institute in Wilton, Conn.
The allocations shift as the endowments get larger. Domestic equities and fixed income make up a larger part of endowment portfolios for smaller endowments than for larger endowments. Larger endowments, in contrast, are far more weighted toward alternative strategies. The largest endowments have 57 percent of their assets in alternative strategies, compared to just 10 percent for the smallest.
The effective spending rate remained the same in 2014 as 2013, with both years being 4.4 percent. That’s up from a nine-year low of 4.2 percent in 2012. The highest spending rates came in 2005 and 2006, at 4.7 percent. The rate dipped in 2008 to 4.3 percent, then climbed the next three years to 4.6 percent in 2011 before dropping again.
When divided by endowment size, most institutions decreased their rate of spending slightly, between 1 and 3 percentage points. Institutions with endowments between $51 million and $100 million kept their spending rate the same, at 4.4 percent. Institutions with the smallest endowments – less than under $25 million — increased spending rate from 4.1 percent in 2013 to 4.6 percent in 2014.
However, because endowments gained so much last year, those rate of spending decreases across the categories mask the fact that more than 7 of 10 of the institutions reported increasing their total dollars spent. The median increase was 9.3 percent.
“The average withdrawal from endowment accounts comprised 9.2 percent of these institutions’ total operating budgets (in 2014). That is up from 8.8 percent in 2013,” said Walda. “The only conclusion you can reach is that endowments are becoming an increasingly important part of the revenue picture.”