Endowments at 426 U.S. college and universities returned an average of 15.8 percent for the fiscal year ending June 30, 2014. The early return data builds on the 11.7 percent average return reported for FY2013.
The data was gathered for the 2014 NACUBO-Commonfund Study of Endowments (NCSE). The data are broken 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.
Larger endowments posted the highest returns for the fiscal year, as institutions with assets greater than $1 billion reported an average return of 16.8 percent and those with assets between $501 million and $1 billion reported an average return of 16.2 percent. Close behind, however, were the smallest participating institutions, those with assets less than $25 million, with returns that averaged 16.1 percent.
Returns for the other three size cohorts fell into a tight range of 15.3 percent to 15.6 percent. All returns are net of fees.
The annual NCSE analyzes return data and a broad range of related information gathered from a nationwide cross section of U.S. colleges and universities, both public and private, as well as their supporting foundations. Some 835 colleges and universities participated in last year’s study. Organizers anticipate that this FY2014 study will be about the same size by the time all data are gathered, analyzed and published in January.
Preliminary data drawn from a smaller sample of 129 institutions show that participating institutions’ trailing three-year average annual returns averaged 8.9 percent; trailing five-year annual returns averaged 11.7 percent; and, trailing 10-year returns averaged 7 percent. The largest endowments reported the highest returns for the trailing three- and 10-year periods, and lagged the highest five-year return by just 10 basis points.
“With only a few exceptions, higher relative performance by the largest endowments is in keeping with the findings of our studies over more than a decade,” said Commonfund Institute Executive Director John S. Griswold. “Smaller endowments, which typically have the largest allocations to traditional asset classes, benefited from the strong performance of liquid domestic and international equities beginning in 2009. But the greater diversification practiced by the largest endowments and their emphasis on a variety of sources of return, both public and private, tends to result in higher long-term investment performance.”
Among additional findings, preliminary study data indicate that colleges and universities are continuing to increase allocations to alternative strategies, which include marketable alternatives, private equity, venture capital, natural resources, distressed debt and private equity real estate. The allocation to alternative strategies grew to an average of 58 percent among the early reporting institutions and to 65 percent among institutions with assets over $1 billion. Last year, alternative strategies accounted for an average of 53 percent of endowment portfolios, a 1-percent decline from the previous year.
No asset class, strategy or sub-asset class/strategy had a negative return for FY2014, according to the preliminary data. Examining the returns reported for various alternative strategies, venture capital has thus far produced the highest return, at 21.2 percent, followed by 18.4 percent for energy and natural resources. Private equity, which includes Leveraged Buyouts (LBOs), mezzanine, M&A funds and international private equity, returned 17.0 percent, distressed debt returned 13.5 percent and private equity real estate (non-campus) returned 11.7 percent. Marketable alternative strategies, including hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives, returned 9.4 percent. Commodities and managed futures returned 9 percent.
Endowments reported an average of 1.5 full-time equivalent employees (FTEs) devoted to the investment management function in FY2014, down from 1.6 FTEs in FY2013. Endowments with assets of more than $1 billion had the largest average staff size, at 11.3 FTEs, while all four cohorts with endowment assets of $500 million or less reported one-half of an FTE or less devoted to investment management. Fifty-four percent of early study respondents said they have substantially outsourced the investment management function, a figure that will represent a significant increase from last year’s 40 percent, if it is confirmed in the final survey.
Some 78 percent of study respondents to date reported using a consultant for various services related to investment management compared with 85 percent a year ago.