Endowments Show Double-Digit Gains

Endowments at U.S. colleges and universities jumped 11.7 percent net of fees for the 2013 fiscal year, according to preliminary data gathered from 461 institutions for the 2013 NACUBO-Commonfund Study of Endowments. It’s a huge improvement compared to the -0.3 percent return reported by study participants for FY2012.

The fiscal year used for the study is July 1 to June 30. By comparison the Dow Jones average in up 20.05 percent since Jan. 1 and nearly 30 percent for the past two years.

The data are broken down 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. Fiscal year 2013 returns were very consistent across five of the six size cohorts, ranging from 11.2 percent to 11.8 percent (all returns are reported net of fees). Institutions with assets between $501 million and $1 billion reported average returns of 12.7 percent. These figures may be modified when the full data set is assembled in the final study.

The annual NCSE analyzes return data and a broad range of related information gathered from U.S. colleges and universities, both public and private, as well as their supporting foundations, according to Commonfund Institute Executive Director John S. Griswold.


Longer-term returns

Additional findings based on preliminary data — drawn from the sample of 206 institutions that have completed the survey — show that participating institutions’ trailing three-year returns averaged 10.4 percent; trailing five-year returns averaged 4.3 percent; and trailing 10-year returns averaged 7.1 percent. Endowments with assets under $25 million reported the highest average three-year return, at 11 percent, while those with assets between $25 and $50 million reported the highest average five-year return, at 5.5 percent. Endowments with assets over $1 billion generated the highest average 10-year return, at 8.5 percent.

One preliminary finding might indicate a pause in the long trend of growth in institutions’ allocation to alternative investment strategies. In FY2013 the average allocation fell to 47 percent of participating endowments’ portfolios from 54 percent in FY2012, according to the published data.

Institutions in four of the six size categories reduced their allocation to alternative strategies, while for the other two the allocation was unchanged. (Alternative strategies include marketable alternatives, such as hedge funds, absolute return, market neutral, long/short 130/30, event-driven and derivatives; private capital, including private equity, international private equity, global venture capital and natural resources; distressed debt; and private equity real estate.)

In contrast to the decline in alternative strategies, participating institutions’ average allocation to domestic equities grew to 20 percent from 15 percent, and their allocation to international equities increased to 19 percent from 16 percent. In combination, this increase to publicly traded equities exceeded the decline in alternative strategies. The allocation to fixed income investments was unchanged at 11 percent, while the allocation to short-term securities/cash/other declined slightly to 3 percent from 4 percent the previous year.

“The data concerning alternative strategies will bear watching as more colleges and universities report their FY2013 results,” according to Griswold and NACUBO President and Chief Executive Officer John D. Walda via a joint statement. “A number of factors are at work here. Colleges and universities may be shifting some assets into more-liquid strategies, but because domestic and international equities were the two best performing asset classes in FY2013, some of the shift may have been the result of market action.”

Preliminary FY2013 returns broken out by asset class are:

  • Domestic equities:                               20.5 percent
  • Fixed income:                                     2.4 percent
  • International equities:                         14.4 percent
  • Alternative strategies:                         8.6 percent
  • Short-term securities/cash/other:         1.0 percent

Breaking down the returns reported for various alternative strategies, distressed debt produced the highest return, at 13.2 percent, followed by 11.3 percent for private equity (LBOs, mezzanine and M&A funds, international private equity) and 10 percent for marketable alternatives (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives). Private equity real estate (non-campus) returned 9 percent, energy and natural resources returned 6.1 percent and venture capital returned 5.9 percent. Commodities and managed futures returned a negative 6 percent, the year’s only investment strategy to report a negative return.

The FY2013 effective spending rate for the 206 institutions included in the preliminary data averaged 4.2 percent, unchanged year over year. The spending rate correlated with the size of the six cohorts; the highest rate, 4.8 percent, was reported by institutions with assets over $1 billion while those with assets under $25 million reported a rate of 3.6 percent.

Thus far in the study, 50 percent of participating institutions have reported an increase in gifts, while 30 percent have reported a decrease in gifts.

Endowments reported an average of 1.2 full-time equivalent employees devoted to the investment management function in FY2013. This was a marked decline from the average of 1.6 FTEs reported for FY2012. Some of this change may be accounted for by a rise in outsourcing. Forty-two percent of Study respondents said they have substantially outsourced the investment management function, up from 38 percent the prior year. Five of six size cohorts reported a greater use of outsourcing in FY2013.

In a new area of inquiry, the study found that 45 percent of participating institutions employ risk limits in their portfolios, while 33 percent said they do not. Sixty-nine percent of this group use volatility calculations, such as standard deviation, and 54 percent use measures such as alpha and beta. Some 39 percent of the 206 total respondents reported using stress testing or scenario analysis for their portfolios.