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Back on track

College endowment returns surge for fiscal year 2011

The average one-year return for the full 2011 universe as of June 30 was 19.2%

Jane Mendillo
Harvard University’s endowment which is overseen by Jane Mendillo ranked No. 1 on the latest table of U.S. endowment funds

Aggregate assets of U.S. educational endowments grew 17.9% in the fiscal year ended June 30 to $408.1 billion, according to the 2011 NACUBO-Commonfund Study of Endowments released Tuesday.

Harvard University ranked No. 1 on the latest table of U.S. endowment funds from the National Association of College and University Business Officers, which also was released Tuesday.

At $31.7 billion, Cambridge, Mass.-based Harvard's assets were up 15.1% from a year earlier and topped second-ranked Yale University, New Haven, Conn., by more than $12 billion. Yale's assets grew 16.3% to $19.4 billion.

University of Texas System, Austin, moved up to third place from fourth with asset growth of 22% to $17.149 billion, barely nudging Princeton University, Princeton, N.J., down to fourth position with assets of $17.110 billion, representing growth of 18.9%. Stanford University, Palo Alto, Calif., retained the fifth-place spot with assets of $16.5 billion, reflecting growth of 19.1% for the period.

Data analyzed in the new study come from 823 U.S. endowments jointly surveyed by NACUBO and Commonfund about the investment management, returns, asset allocation and other activities for the fiscal year ended June 30.

The average endowment size among responding institutions was $495.9 million, while the median size was $90 million, said John D. Walda, NACUBO's president and CEO, during a conference call.

The average one-year return for the full 2011 universe as of June 30 was 19.2%, following on an average return of 11.9% the prior year.

In 2010, a larger and slightly different universe of 850 institutions responded to the survey. The recalculation of the aggregate assets of the 799 endowments that participated in both the 2011 and the 2010 surveys is $404 billion in 2011 and $342.2 billion for 2010, showing growth of 18.1% for the year ended June 30, William F. Jarvis, managing director and director of research for Commonfund, said in an e-mail.

Still not enough

The strongly positive returns of the past two years were not enough to counteract the -18.7% average return of the full NCSE universe for the fiscal year ended June 30, 2009, and the -3% average return for fiscal 2008.

Nearly half — 47% — of the 755 institutions that participated in the survey in both 2009 and 2011 reported that their total endowment assets still are below the total of fiscal year 2008.

The “take-away” is that even with a one-year average return of 19.2%, over the long term “many institutions still are struggling to get (their assets) back (to) where they were four or five years ago,” said Verne O. Sedlacek, president and CEO of Commonfund, during a conference call.

When pressed about the impact of volatile global markets in the second half of 2011, which are not included in the latest NCSE report, Mr. Sedlacek estimated that on average, returns of the full universe could be down three to four percentage points for the six-month period.

Over longer time periods, the annualized average returns of the NCSE universe for multiyear periods ended June 30 were 3.1% for three years; 4.7% for five years; and 5.6% for 10 years.

Mr. Sedlacek said that to maintain university spending rates that averaged 4.6% in 2011 for the whole universe and to keep pace with inflation, endowments need investment returns of 8% to 10% per year. Given average annual returns well below that range for the past decade, Mr. Sedlacek said “the average university has lost purchasing power.”

Zeroing in on the year ended June 30, NACUBO's Mr. Walda said the spread of returns between the largest and smallest endowments was fairly normal, with endowments of more than $1 billion producing the best average return of 20.1%. He noted that by contrast, the average return of endowments with less than $25 million was 17.6%.

Endowment performance in fiscal 2011 was driven by strong equity market returns — the average full universe return was 30.1% for domestic equities and 27.2% for international equities — as well as by the individual asset-class returns within the alternative strategies class, which in aggregate produced a 14.1% average return, Mr. Sedlacek said.

Average returns for alternative strategies were private equity, 18.7%; marketable alternatives (hedge fund, 130/30 and derivatives strategies), 9.4%; venture capital, 21.7%; real estate (non-campus), 10.3%; energy and natural resources, 23.5%; commodities and managed futures, 26%; and distressed debt, 14.5%.

On a dollar-weighted basis, the allocation to alternatives for the total universe was 53%, with the largest endowments having the highest allocation at 60% of total assets. The dollar-weighted allocation to alternatives diminished steadily as endowment size went down, with just a 10% allocation for the smallest endowments.

“Alternatives continue to work for endowments to dampen volatility and enhance returns over the long term,” Mr. Sedlacek said, noting that returns for large endowments were pumped up not only by the overall size of their alternative asset allocation but also by access to top-tier private equity and venture capital managers.

Allocation to alternatives

Smaller endowments don't have the clout to invest with top-flight private equity and venture capital managers and have to rely instead on larger allocations to hedge funds, which in 2011 were the worst-performing alternative asset class on average and “a fairly significant drag on portfolio returns compared to other alternatives,” Mr. Sedlacek said.

Endowments topping $1 billion, for example, split their alternative investment allocation on a dollar-weighted basis to marketable alternatives, 34%; private equity, 26%; energy and natural resources, 15%; real estate, 13%; venture capital, 8%; and distressed debt, 4%.

By comparison, endowments smaller than $25 million invested on a dollar-weighted basis 60% in marketable alternatives, 12% in energy and natural resources, 9% in real estate, 8% in private equity, 7% in distressed debt, and 4% in venture capital.

A growing trend toward investment outsourcing may assist many smaller endowments in getting better returns because the larger commingled funds designed for endowment investment may provide improved access to more desirable private equity and venture capital managers and more balanced allocations across the spectrum of alternative investments, Mr. Sedlacek predicted.

Overall, 39% of all survey respondents said they have “substantially” outsourced the investment management of their endowments, said Commonfund's Mr. Jarvis in an interview.

While the assets of just 8% of endowments with more than $1 billion have been outsourced, 48% of endowments between $25 million and $50 million have been outsourced and 50% of those with less than $25 million now are primarily managed by external parties.

Of those endowments that do not outsource, Mr. Jarvis said 56% said they are not considering it. None of the endowment officers of asset pools larger than $1 billion said they are considering outsourcing, but between 5% and 7% of officials of endowments totaling less than $500 million said they are pondering hiring an outsourcer to assume management of their funds.