by Christopher Faille
The 2013 NACUBO-Commonfund Study of Endowments (NCSE) indicates that the endowments of the 835 U.S. colleges and universities in its database returned an average of 11.7%. This is a notable improvement on the flat/slightly negative showing a year ago. The FY2012 return was -0.3%. [These, and all return figures mentioned below, are net of fees.]
The improvement is, of course, good news for U.S. education. As the NCSE data also indicates, responding institutions draw an average of 8.8% of their operating budget from their endowment.
Small Shift Toward Equity
You get an idea of the range behind that average figure if you break it down by the endowment's size. Institutions with assets under management (AUM) of over $1 billion in their endowments draw 16.2% of their operating budget from that source: institutions with less than $25 million AUM draw only 2.5%. Still: good news for the investment results of endowments relieves, somewhat, the fiscal pressures on the system as a whole.
In other news: endowments are sticking with the "endowment model", that is, their asset allocations remain stable. For example, in 2012, the surveyed institutions had 15% of their total equity in domestic equities and 16% in international equities. In 2013, those figures became 16% and 18% respectively. This shows what NACUBO and Commonfund call a small shift toward equity, away from either bonds or alternatives.
But the shift, such as it is, is not significant. It is the consequence of the remarkable performance of both U.S. and international stocks over the course of the intervening year, rather than of any allocative decision toward equities.
If we look at alternative strategies as a whole: they accounted for 54% of the portfolio of the surveyed institutions in 2012 and for 53% in 2013. The larger endowments are more heavily weighted toward alternatives than are the smaller. Those with more than $1 billion have 59% of it so invested. Those with under $25 million have just 11% of it so invested.
What may be more significant than that incremental change is that there has been a slow downward movement in recent years in the size of the cash allocation, across the board in terms of the size of the institutions. Cash and cash-like securities now represent just 3% of the average portfolio.
The data also allow us a more granular look at the Alternatives portion of the endowments' portfolios. The term "Alternatives" is defined very broadly to include seven distinct strategies: private equity, marketable alternative strategies (that is, hedge funds), venture capital, PE real estate, commodities, energy & natural resources, and distressed debt.
Endowments still seem to see distressed debt and venture capital strategies as quite exotic - they were only 4% and 7% respectively of the alternatives portion of the collective portfolio last year, and those two numbers have held constant this year. Hedge funds are the largest allocation within the group, and loom larger the smaller the size of the endowment - they are 70% of the alternatives portion of the AUM of institutions under $25 million, 35% of the AUM of institutions over $1 billion.
But let's return to the issue of performance. Among the alternative strategies, one of those exotics, distressed debt, did the best, returning 14.8%. The hedge funds did quite well also, returning 10.5%. Commodities were the only alternatives classification that produced a negative return in 2013, at -6.1 percent. Over a 10-year period, endowments of all size categories produced much higher returns than they would have gotten from the benchmark NACUBO-Commonfund applied, a 60/40 portfolio where the 60% equity is represented by the S&P.
All that said, there is a dark lining to the generally bright cloud of 2013 performance: that the institutions questioned have an average long-term target rate of 7.4%, and that they still haven't achieved that in terms of their 10-year average annual returns. In recent years, there has been a ratcheting up of pressure from policy makers to keep tuition low, and that increases the need for colleges to find the money elsewhere. NACUBO and Commonfund expect that the continued roll-out of Massive Open Online Courses (MOOCs) will be one response to this situation, as will the creation of new academic programs in health care and in other high-demand fields.