Endowments Just Starting to Recover

This represents a marked improvement over the average 11.9% return reported for FY2010 and a continuation of the recovery from the -18.7% return reported for FY2009, when the financial crisis and accompanying slide in equity markets negatively affected educational endowments. Over the medium term, however, returns were still below the average inflation-adjusted spending rates of educational institutions, indicating that the damage inflicted by the downturn is still being felt by endowments.  

“Even though we had a really great year, many institutions are still not recovered from the recession; 47% have endowment market values below what was reported in 2008. Endowments are just starting to make up now for losses experienced in 2008/09,” said NACUBO President and Chief Executive Officer John D. Walda, at a press conference.  

According to the study, the average annual three-year return for participating institutions was 3.1%, a welcome rebound from the FY2010 three-year return of -4.2%. The corresponding five-year return figure was 4.7%, up from 3.0% in FY2010, while the average annual return over 10 years rose to 5.6% from 3.4% a year ago.  

“Over the last three years, returns have not kept up with the spending of institutions,” Walda noted. “They need to generate somewhere between 8% and 9% in returns to keep even with the average annual 4.6% effective spending rate of these educational institutions and inflation.”  

Respondents reported positive average returns for all asset classes this year, including private equity real estate (non-campus), which was the only strategy to report a negative return for FY2010. As was true last year, the highest return came from domestic equities, which gained 30.1%, nearly doubling FY2010’s 15.6% return.   

This was followed by international equities, which generated a 27.2% return; the broad group of alternative strategies at 14.1%; fixed income at 6.5%; and short-term securities/cash at 0.5%.   

Within the alternative strategies category, the highest returns came from commodities and managed futures (26 %), energy and natural resources (23.5%) and venture capital (21.7%). Marketable alternatives—a category that includes hedge funds, absolute return, market neutral, long/short, 130/30, event-driven strategies and derivatives—returned 9.4%, little changed from last year’s 9.9% return. Private equity returned 18.7% and distressed debt returned 14.5%.  

“Alternative investments have certainly become a part of the investment strategy that has boosted returns,” Commonfund Institute Executive Director John S. Griswold told press conference attendees.  

As of June 30, 2011, participating institutions’ dollar-weighted asset allocation was: 

• Domestic equities: 16%, 
• Fixed income: 10%, 
• International equities: 17%, 
• Alternative strategies: 53%, and 
• Short-term securities/cash/other: 4%. 

“Overall, the study shows the endowment model, which embraces diversity and long-term returns, works pretty well,” Walda concluded.