Strong U.S. Stock Market Put College Endowments Back in the Black in 2013

January 28, 2014

College endowments rebounded in the 2013 fiscal year, returning an average of 11.7 percent, according to a benchmark survey released on Tuesday. The figure was in stark contrast with 2012, when investment returns were minus 0.3 percent.

The Nacubo-Commonfund Study of Endowments looks at data from more than 800 North American education institutions with endowment assets totaling $448.6-billion. The annual survey is compiled jointly by the National Association of College and University Business Officers, or Nacubo, and the Commonfund Institute, the education and research arm of the Commonfund, an institutional-investment firm.


Leaders of the two organizations credited the bulk of the gain to the strength of the American stock markets, which generated an average return of 20.6 percent for the fiscal year that ended on June 30, 2013.

"It's notable that we're now at a point that, in at least seven of the last 10 years, we've been in positive territory in terms of returns," John D. Walda, Nacubo's president, said in an interview last week. "High on my wish list is that we would continue to have this level of returns and not see these very volatile markets that we've seen over the past 12 years."

But the stock market owes much of its success to the U.S. Federal Reserve's bond purchases of $85-billion a month, a program known as quantitative easing. The Fed has begun tapering off its bond purchases, dropping to $75-billion this month. Mr. Walda said he could not predict how the domestic markets would respond to further changes in monetary policy or to faltering international markets.

Considering Alternatives

At the top of the heap once again was Harvard University, with an endowment valued at $32.33-billion. It was followed by Yale University at $20.78-billion, the University of Texas system at $20.45-billion, Stanford University at $18.69-billion, and Princeton at $18.20-billion.

One highlight of the new study was an uncharacteristic consistency in the one-year measure of total endowment returns among institutions in the six different endowment-size cohorts. The average return for colleges with endowments of more than $1-billion was 11.7 percent, mirroring the average for colleges with endowments below $25-million, as well as the average for all institutions.

The similarity was notable because the two classes of institutions generally followed very different investment strategies in 2013. Members of the under-$25-million group invested an average of 43 percent of their endowments in stocks, 26 percent in fixed-income investments, and 11 percent in so-called alternative strategies, which include such asset subclasses as commodities, distressed debt, private equity, and venture capital.

The over-$1-billion group invested 13 percent of its funds in stocks, 8 percent in fixed-income investments, and 59 percent in alternative strategies. Fixed-income investments returned just 1.7 percent last year, and alternative strategies generated 8.3 percent.

Although institutions with smaller endowments performed similarly to wealthier colleges in 2013, the larger endowments fared better over a 10-year period.

Verne O. Sedlacek, chief executive officer of the Commonfund, said that institutions with endowments under about $350-million tend to skew their investments toward a more traditional mix of stocks and bonds because they don't have access to the best fund managers unless they are willing to hire outside firms. Larger institutions go directly through their own managers, giving them access to the full range of alternative investments, he said.

Increases in Spending

In a Commonfund white paper issued three weeks ago, "Alternatives Reality: What to Expect From Future Allocations," Mr. Sedlacek wrote that institutional allocations to alternative investments across all cohorts had risen from 23 percent in 2001 to 54 percent in 2012. He is bullish on the advantages of alternative strategies, arguing that institutions have increased their returns and reduced their risk by relying on them.

To be sure, he said in an interview last week, institutions must ask themselves many questions before diving into alternatives. "First is, 'How much liquidity do I need in the portfolio?'" Mr. Sedlacek said. He pointed out that institutions with some of the largest endowments in academe had to borrow money in 2008-9 because they had created cash-flow problems for themselves by investing too much in alternatives.

But he added, "our belief is that a lot of the natural benefits that accrue to illiquid investments, particularly in the private-equity space, continue to exist today."

Also noteworthy was an increase in colleges' effective spending rates of their endowments, from 4.2 percent in 2012 to 4.4 percent in 2013, the Nacubo-Commonfund study found. Endowments contributed 8.8 percent of colleges' operating revenue, on average. Over all, 67 percent of endowments increased their spending in 2013. Among that group, the average increase in spending was 17.4 percent.

Institutions in the smallest class of endowments showed the biggest increases in spending, up from 3.7 percent to 4.1 percent. Mr. Walda said that pattern suggested that institutions were responding to two things: the need to provide more financial aid to students and the recognition that, with their endowments back in positive territory, they can once again afford to spend.

Correction (1/28/2014, 1:25 p.m.): This article originally described incorrectly what the Nacubo-Commonfund Study of Endowments measures. It measures endowments' investment-return rates, not changes in the value of endowments. The article has been updated to reflect this correction. A separate table lists the market values of individual college endowments as a result of spending, gifts, and investment gains or losses.