Endowment Gains Still Trailing Equities Markets

Endowments of the nation’s colleges and universities rebounded last year from negative returns in 2012 to gain nearly 12 percent but still trailed one-year returns for most major indices. The 10-year returns for smaller endowments — those with less than $1 billion in assets — continued to lag their targets.

It’s the fifth year that the National Association of College and University Business Officers (NACUBO) partnered with Commonfund Institute to compile the NACUBO-Commonfund Study of Endowments (NCSE), released this morning.

While the 835 participants in the annual study enjoyed returns of 11.7 percent for the year ending June 30, 2013 after -0.3 percent in 2012, they lagged the 20-percent return by the S&P 500. It was the seventh year of the past 10 that saw positive average one-year returns. Returns were negative in 2008 (-3 percent), 2009 (-18.7 percent) and 2012 (-0.3 percent). All returns are reported net of fees.

The 10-year returns were an average 7.1 percent, lagging the average long-term target of 7.4 percent. Endowments in the categories of $1 billion or more and $501 million to $1 billion both surpassed the target returns, at 8.3 percent and 7.6 percent, respectively. It was the smaller endowments, those with assets of $1 billion or less, that not meet 10-year target returns of 7.4 percent.

The 835 endowments in the study had total market assets of $448.6 billion. The average endowment was nearly $540 million and the median was $97.6 million.

One-year returns were similar by endowment size but larger funds had greater returns over the long term. Over 10 years, endowments of all sizes produced much higher returns than the S&P/Barclays Blend allocation of 60 percent stock and 40 percent bonds. The endowment model of diversified portfolios that include alternatives “still works to produce greater long-term results,” according to the study.

“The strong performance by endowments is encouraging at a time when the global economy continues its relatively slow recovery from the economic crisis of five years ago,” Commonfund Institute Executive Director John S. Griswold said via a joint statement announcing the results. “This year’s investment results reflect in large measure the strength in publicly traded equities that has prevailed since early 2009. While larger endowments have performed better over the longer-term 10-year period, smaller endowments with higher allocations to domestic equities have done well in the shorter term — a result that has enabled them to continue to support their educational missions,” he said.

One-year returns were consistently above 11 percent among institutions of all sizes, with a high of 12 percent among endowments of $501 million to $1 billion in assets. Those with $25 million to $50 million had the lowest return at 11.4 percent.

The rebound was led by a 20.6-percent return by domestic equities, compared with 2 percent the previous year, and international equities, which returned 14.6 percent, compared with the nearly 12 percent decline that dragged down the 2012 average. Alternative strategies also enjoyed a better 2013, generating an 8.3-percent return versus 0.5 percent the previous year. The return on fixed income was 1.7 percent, down from the 6.8 percent in 2012.

Five-year returns all hovered between 3.8 percent ($1 billion-plus and $101 million to $1 billion) and 4.9 percent, (less than $25 million), with an overall average of 4 percent. Ten-year returns ranged from 6.3 percent (less than $25 million) to 8.3 percent (more than $1 billion) with an overall average of 7.1 percent.

Asset allocation remains stable with small shifts toward equities and away from bonds and alternative strategies like hedge funds and private equity. Alternative strategies made up on average 53 percent of assets but among smaller endowments ($100 million or less), alternatives made up less than a quarter. Smaller endowments trended more toward domestic equities, at least a third to more than 40 percent of assets, while larger endowments held less than 20 percent in those assets.

Effective spending rates grew from 4.2 percent to 4.4 percent, the first increase since dipping from 4.6 percent in 2011. Two-thirds of endowments increased their spending dollars, with an average increase of 17.3 percent among those that raised endowment spending, according to the study. On average, endowment income accounts for 8.8 percent of institutions’ operating revenue, ranging from a low of 2.5 percent for those with less than $25 million in assets to a high of 16.2 percent for those with more than $1 billion.