Higher Education Endowment Returns Rise

Preliminary data gathered from 461 U.S. colleges and universities for the “2013 NACUBO-Commonfund Study of Endowments (NCSE)” found endowments returned an average of 11.7% for the 2013 fiscal year (July 1, 2012 to June 30, 2013). This is noted as an improvement over the -0.3% return from the 2012 fiscal year.

The data for the study is divided into six categories, according to size of endowment, ranging from institutions with endowment assets less than $25 million to those in excess of $1 billion. The 2013 fiscal year returns show consistency across five of six categories, ranging from 11.2% to 11.8%. Institutions with assets between $501 million and $1 billion show average returns of 12.7%. NACUBO and the Commonfund Institute note that these figures may be modified when the study is complete.

The study is also analyzing 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. Eight hundred thirty-one colleges and universities participated in last year’s study. It is anticipated that this year’s study will be similar in size. Returns thus far are based on 206 endowments and foundations that have completed the full 2013 study, plus a further 255 that have publicly announced their one-year returns but have not yet completed their study questionnaire.

Longer-Term Returns

Additional findings based on preliminary data show participating institutions’ trailing three-year returns averaging 10.4%, with trailing five-year returns averaging 4.3% and trailing 10-year returns averaging 7.1%. Endowments with assets less than $25 million report the highest average three-year return at 11%, while those with assets between $25 and $50 million report the highest average five-year return at 5.5%. Endowments with assets greater than $1 billion post the highest average 10-year return at 8.5%.

One preliminary finding may indicate a pause in the long trend of growth in institutions’ allocation to alternative investment strategies. In the 2013 fiscal year, the average allocation fell to 47% of participating endowments’ portfolios from 54% in 2012. Institutions in four of the six size categories reduced their allocation to alternative strategies, while the allocation was unchanged for the other two. The study notes alternative strategies include marketable alternatives, private capital, distressed debt and private equity real estate.

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

“The data concerning alternative strategies will bear watching as more colleges and universities report their fiscal year 2013 results,” say NACUBO President and Chief Executive Officer John D. Walda and Commonfund Institute Executive Director John S. Griswold in 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 fiscal year 2013, some of the shift may have been the result of market action.”

So far the study has found returns, broken out by asset class, are as follows:

• Domestic equities (20.5%);
• Fixed income (2.4);
• International equities (14.4%);
• Alternative strategies (8.6%); and
• Short-term securities/cash/other (1%).

Distressed Debt Leads Alternative Strategies

For alternative strategies, distressed debt produced the highest return so far in the study at 13.2%, followed by 11.3% for private equity and 10% for marketable alternatives. Private equity real estate has returned 9%, energy and natural resources 6.1% and venture capital 5.9%. Commodities and managed futures returned -6%, the year’s only investment strategy to report a negative return.

So far, the effective spending rate for the institutions in the study has averaged 4.2%, unchanged from last year. The spending rate correlates with the size of the six categories. The highest rate of 4.8% is from institutions with assets more than $1 billion, while those with assets less than $25 million report a rate of 3.6%.

The study also shows 50% of participating institutions report an increase in gifts, while 30% report a decrease.

Full-Time Staff Declines

Endowments report an average of 1.2 full-time equivalent employees devoted to the investment management function in fiscal year 2013, which is a decline from an average of 1.6 for 2012. The study attributes some of this change to a rise in outsourcing. Forty-two percent of those queried for the study have substantially outsourced the investment management function, up from 38% last year.

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

All data for the 2013 study is slated to be gathered, analyzed and published by January 2014. Final study results and analysis will include data on governance policies and practices. It will also break out data not only by size of endowment, but also by type of institution.

NACUBO is an association that advances the economic viability and business practices of higher education institutions in fulfillment of their academic missions. The Commonfund Institute provides long-term investors with investment information and professional development programs.