February 13, 2013

College Endowments Posted Negative Returns in FY2012

NACUBO-Commonfund study shows wealthiest institutions had best returns

U.S. college and university endowments shrank in fiscal 2012, according to a new study.

The 2012 NACUBO-Commonfund Study of Endowments reported that institutional endowments returned an average -0.3% (net of fees) in the year ending June 30, down from an average return of 19.2% in FY2011.

Ten-year returns for the year were 6.2%, compared with 5.6% a year earlier. This suggested that long-term performance continued to improve for many institutions, the report said.

The 2012 NCSE report analyzed data from 525 private and 306 public institutions, representing some $406 billion in total endowment assets. Ninety-four percent of participants also took part in the previous year's study.

The report broke down data into six categories according to size of endowment. The largest endowments with assets of more than $1 billion produced the highest return, an average of 0.8%.

Endowments with assets between $501 million and $1 billion and the smallest ones, with assets under $25 million, also reported positive returns, 0.4% and 0.3%, respectively. All three of the midsize cohorts reported negative returns.

The fiscal 2012 data showed that institutions’ trailing three-year returns averaged 10.2%, trailing five-year returns averaged 1.1% and trailing 10-year returns averaged 6.2% (all net of fees). Endowments with assets exceeding $1 billion generated the highest average return for all periods.

The report said fixed-income investments produced the highest return, an average of 6.8%, while international equities produced the lowest return, -11.8%. Domestic equities returned 2%, alternative strategies as a group returned 0.5% and short-term securities/cash/other returned 0.2%.

“This year’s data show the re-emergence of a number of long-term trends in the sector,” NACUBO President and CEO John Walda and Commonfund Institute Executive Director John Griswold said in a joint statement.

“Over the years, with the exception of periods such as the recent economic crisis, institutions with the largest endowments have reported the highest one-year returns. This trend can once again be seen in this year's data, as well as data for trailing periods. ”

They attributed the outperformance to several factors:                            

  • Well-diversified portfolios with an equity bias
  • The ability to make long-term commitments to less liquid strategies
  • Access to top-tier investment managers
  • Greater resources, including larger staffs, leading-edge technology and experienced investment committees.

The long-term trend of increasing allocations to alternative investment strategies continued in 2012, according to the report. These strategies included private equity, marketable alternatives, venture capital, private equity real estate (non-campus), energy and natural resources, and distressed debt.

The year's data indicated that participating institutions’ allocation to alternatives grew by one percentage point to 54%. The alternatives allocation was correlated by endowment size, with institutions having endowment assets in excess of $1 billion reporting a 61% allocation to alternatives and those with assets under $25 million reporting an average allocation of 11%.

The three smaller size cohorts reported the largest allocations to domestic equities and fixed income. In a continuation of a trend observed in recent years, allocations to short-term securities/cash/other were smallest among endowments with assets above $1 billion, at 3%, and largest among endowments with assets below $25 million, at 7%.

In fiscal 2012, 39% of institutions reported that they had received less in gifts than in the previous year, while 41% reported an increase in gifts. The median total of new gifts was $2.2 million, while the average total of new gifts was $8 million. Gifts were correlated with the size of the institution’s endowment; both median and average gifts were highest, by far, among institutions with assets more than $1 billion.

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