The National Association of College and University Business Officers (NACUBO), in collaboration with the education and research arm of Commonfund, have released their annual study of the performance of college and university endowments.
This study, which draws on a database supplied by 823 U.S. institutions of higher learning, reports that endowments’ average return for the 2011 fiscal year (the twelve months beginning July 1, 2010) was significantly improved over the year preceding, but that returns remain below the average inflation-adjusted spending rates for such institutions. This indicates that endowments continue to suffer from the damage inflicted by the crisis of 2008.
The average return for FY 2011 was 19.2 percent, a significant improvement from FY 2010, when return was 11.9 percent.
Spread Between Small and Large
The smallest institutions were hit the hardest by the slide in equity markets in the years 2008-2010. As the table below indicates, institutions with fewer than $25 million under management earned a return of only 11.6 percent for FY 2010, 30 basis points below the average of the whole database. The largest endowments, on the other hand, those with over $1 billion under management, made 12.2 percent that year, which was 30 basis points above the average.
Yet this spread of 60 basis points between best and worst performers, largest and smallest institutions, was historically a narrow one. Large endowments have long tended to outperform their colleagues, and they usually do so by larger margins than that. Indeed, the return spread for FY 2011 – also evidenced on the table below – was considerable larger than that of the year before. Again, the smaller funds did least well, with a return of 17.6, or 160 basis points below average. Those brontosaurs at $1 billion or up, on the other hand, received a return of 20.1, or 90 basis points above average. The range between lower and highest performing endowments, then, had expanded to 250 basis points.
Analysis by Asset Class
The study breaks the 2011 return down by asset class, finding that domestic equities were the best performing class (30.1 percent). Endowments did quite well on the international equities, too: 27.2 percent. Alternative asset classes together lagged those, coming in at 14.1 percent.
Within the broad category of “alternative assets” there is a further breakdown. Commodities and managed futures were the stand-out therein: 26 percent. A subcategory known as “marketable alternatives” was the laggard, at just 9.4 percent, a slight drop from last year’s 9.9 percent. The marketable alternatives include hedge funds, absolute return, long/short, 130/30, event driven strategies, and derivatives.
The performance of alternative strategies depends in part, it seems, on the size of the institution employing them. Endowments with assets of more than $1 billion made a 16.9 percent return on their use of such strategies in FY 2011. Endowments with between $101 and $500 million dollars under management made 15.4 percent return. Those hapless smaller institutions, the under $25 million group, made only 9.5 percent.
As of June 30, 2011, more than half (53 percent) of the assets managed by participating institutions fell under the broad “alternative strategies” heading. The second largest category was international equity (17 percent). In both cases, the allocation was a one percent increase from the allocation to that same class a year before.
Debt, Costs, and ESG
Nearly three-quarters of the respondents (615) reported that they carry debt. Of those, the average long-term debt stood at $189 million as of June 30, 2011. This is up $21.2 million over the last two years. NACUBO notes that “many larger institutions lowered their debt levels while some smaller Study participants increased debt moderately.”
In one respect, the smaller institutions have an advantage. The study concludes that they have lower costs. On average, management of a portfolio costs an endowment 64 basis points. For the largest class of endowments, though, the cost is 96 basis points.
Among the institutions surveyed, 146 said that they apply some environmental, social, and governance (ESG) criteria to their portfolio holdings. Of those, 58.3 percent employ “negative screen,” 58.5 percent use “impact investing” and 15 percent follow “sustainable investing practices.”
In a joint statement, NACUBO Chief Executive John D. Walda and Commonfund Executive Director John S. Griswold cautioned about the troubles in the equity markets subsequent to the close of the 2011 fiscal year. They say that “headwinds and high volatility” related to the debt crisis in Europe and the continuing high rate of unemployment in the U.S. got rolling only in July, after the close of the FY. “Endowments very certainly were stressed by these factors during the latter part of the calendar year.”