Colleges' Endowments Rebound After a Flat Year, Preliminary Data Show

November 07, 2013

Investment returns for college endowments averaged 11.7 percent in the 2013 fiscal year, a sharp improvement over the previous year's average return of minus 0.3 percent, according to preliminary figures from an annual survey.

A final version of the survey, which is compiled jointly by the Commonfund Institute and the National Association of College and University Business Officers, will be released in January and is expected to include data from more than 800 public and private educational institutions in North America. The preliminary findings, released on Wednesday, show investment returns, net of fees, for 461 colleges in the United States.

William F. Jarvis, managing director of the Commonfund Institute, attributed the strong performance to the "extraordinary accommodation and support for the equity market" by the U.S. Federal Reserve and the European Central Bank. He said that referred to "not just quantitative easing, but all the support that's been provided by the Fed and by the European Central Bank to support equity markets and to enable people to feel prosperous so that they'll spend and grow economies." Given the equity bias that most endowments have, Mr. Jarvis said, "it would be surprising if we had not had some good results."

The Nacubo-Commonfund Study of Endowments divides institutions into six categories based on endowment size, from those with less than $25-million in assets to those with more than $1-billion. Average returns ranged from 11.2 percent to 11.8 percent in five of the six groups. The outlier was the class of institutions worth $501-million to $1-billion, which enjoyed average returns of 12.7 percent.

The preliminary survey does not break out the results of individual institutions, but Bowdoin College made news two months ago when it reported a 16-percent investment return, an achievement that tipped the value of its endowment over $1-billion for the first time.

Among all institutions included in the preliminary survey, three-year returns averaged 10.4 percent, five-year returns averaged 4.3 percent, and 10-year returns averaged 7.1 percent.

A Shift to Equities

Although investment managers often preach the value of a diversified portfolio, Mr. Jarvis noted that the strong support of the central banks had rewarded institutions that had invested strongly in equities, or stocks, in international and domestic companies, two of the best-performing asset classes of the past fiscal year. A year earlier, the euro crisis and uncertainty about growth in China had made international equities the biggest loser in the survey for 2012, returning an average of minus 11.8 percent across endowments of all sizes.

Colleges in the preliminary survey for 2013 reported increasing their average allocations to domestic equities to 20 percent, up from 15 percent the previous year, and to international equities to 19 percent, up from 16 percent.

The preliminary survey also noted that institutions seem to be allocating less to so-called alternative investment strategies, an asset group that includes a mix of subclasses like private equity, private-equity real estate, venture capital, commodities, and distressed debt. But Mr. Jarvis cautioned against reading too much into that shift, pointing out that some of the biggest institutions had not yet reported their figures.

Half of the institutions that participated in the preliminary survey reported an increase in charitable gifts, while 30 percent reported a decrease.

The report also noted that institutions are increasingly outsourcing their investment-management responsibilities, with 42 percent of survey respondents reporting "substantial" outsourcing, up from 38 percent a year earlier. As their portfolios have become more complex, Mr. Jarvis said, many institutions are rethinking the wisdom of relying on a volunteer investment committee that meets three or four times a year.

"That really isn't enough," he said. "You have to be able to be agile in this market" because investment opportunities can quickly vaporize.

The wealthiest institutions—those with more than $500-million in assets—continue to rely on their own skilled internal staffs, Mr. Jarvis said. "But we've seen some fairly sizable institutions—with $300-million or $400-million—that have outsourced" their investment operations. Among the $100-million-and-under group, outsourcing is common, he said.

The report pointed out that institutions with assets over $1-billion had the highest rate of spending of their endowments, 4.8 percent. The average for all institutions was 4.2 percent, a number that has remained constant "year over year," according to the report.

"Despite the volatility and unpredictability of investment returns, spending rates have not gone down," Mr. Jarvis said. "They're continuing to support their missions, and I think that's really encouraging."