Size doesn't always result in better return, analysis finds
Fiscal year-end returns of the 25 largest U.S. endowments spanned a wide 1,080 basis-point range, from 9.7% to -1.1%.
Investment industry lore holds that the larger the endowment, the better investment staff it can afford to hire and the higher the fund's resulting annual returns. But the truth is not so rosy for some of the largest educational pools.
Harvard University, Cambridge, Mass., might have the largest U.S. endowment fund at $30.7 billion, managed by one of the largest university investment units but its -0.1% return as of June 30, the end of its fiscal year, ranked 18th among its 20 peers that share the same fiscal year and provided a return, according to a review by Pensions & Investments.
Joining Harvard with negative returns were the seventh largest endowment, University of California, Oakland, with $10.3 billion in assets and a -1.1% return, and the eighth largest, the $7.9 billion endowment of the University of Michigan, Ann Arbor, which returned -0.5%, all as of June 30.
The $10.3 billion endowment of Massachusetts Institute of Technology, Cambridge, the sixth largest fund, was the best performer among endowments with a June 30 fiscal year end, with an 8% return, followed by the $6.5 billion University of Chicago endowment, which came in at 6.8%; the $3.5 billion endowment of Dartmouth College, Hanover, N.H., with a 5.8% return; and Emory University, Atlanta, where the $4.4 billion endowment returned 5.7%.
Endowment investment staff couldn't be reached for comment by press time because their institutions were mostly closed for the holiday break, but industry observers noted the fiscal year ended June 30 was a tough one.
The average one-year return for the 20 endowments with fiscal years ended June 30 that provided a return calculated by P&I was 2.8%. That is well above the 1.2% average for the same date for endowments of more than $1 billion, according to the preliminary estimate of the research team tabulating results of the annual NACUBO-Commonfund Study of Endowments, which will be released on Jan. 31.
For endowments of all sizes, 2012 fiscal returns were much worse than returns for fiscal 2011. Preliminary results of the NACUBO-Commonfund survey showed an average one-year return as of June 30 of -0.3%, about 1,900 basis points below the prior year.
The 1.6% return of the $6.8 billion endowment of the University of Pennsylvania, Philadelphia, for example, was about 1,700 basis points lower than the return of the previous fiscal year.
“Last year was one in which when you looked at the math, the earnings, the cash flow, the balance sheets, the fundamentals, you would logically have bought equities,” said Monica Issar, managing director and head of the endowments and foundations group at J.P. Morgan Asset Management (JPM), New York.
“But so many outside macro factors made many investors nervous, and they didn't move into equities. Entities that were exposed significantly to stocks did well, earning not just market beta but also alpha from manager selection. 2012 was all about taking risk, especially equity risk,” Ms. Issar said.
For endowments with fiscal years ended June 30, the average equity allocation, including domestic, international and emerging markets equity, was 26.8%, ranging from a high of 38% for the $5.6 billion endowment of Duke University, Durham, N.C., which returned 1% for the year, to a low of 13.6% for the $19.3 billion endowment of Yale University, New Haven, Conn.
But Christopher Adkerson, a principal at investment consultant Mercer Hammond, St. Louis, said equity returns, especially for international stocks, were disappointing for the year ended June 30 and hurt a lot of endowment pools. He pointed to the -5.95% return of the Morgan Stanley (MS) Capital International All Country World index for the period and the -13.36% return of the MSCI Europe Australasia Far East index as the main culprits.
“Asset allocation made a very big difference in 2012,” Mr. Adkerson argued, noting both the Yale endowment and the $17 billion endowment pool of Stanford University, Palo Alto, Calif., “are very much oriented toward international equities. Yale returned 4.7% and Stanford, 1%, for the year ended June 30, putting them in sixth and 15th place on P&I's performance ranking.
More additive to endowment returns for the year ended June 30 were allocations to alternative investments in general and to private equity in particular, said Mr. Adkerson, who is national segment leader of higher education endowments for Mercer Hammond.
The average allocation to alternatives of the 14 endowments with June 30 fiscal year ends for which allocation breakouts were available was 59.2%. By asset class, it was: 20.7% for private equity; 17.8% for hedge funds; 8.4% for real estate; and 12.3% for other, which for most funds includes natural resources and other real assets, venture capital and special situations investments.
Mr. Adkerson is optimistic about the return potential of equities, especially international equities, in the 2012-'13 fiscal year. “The equity risk premium looks very good because Treasuries look so bad,” he said, adding “we like large-cap better than smid, international better than domestic, and active over passive.”
Mr. Adkerson said equity markets began to dramatically improve after June 30, with both the S&P 500 and the Russell 3000 index coming in at 30.2% for the year ended Sept. 30 and the MSCI ACWI index leaping to 21.7%.
Three endowments with Aug. 31 and Sept. 30 fiscal year ends were buoyed by those third-quarter equity returns.
The smallest — $2.6 billion — endowment in P&I's ranking, that of New York University, returned 9.7% for the year ended Sept. 30. The 11th largest endowment, the $7.2 billion Northwestern University endowment based in Evanston, Ill., returned 5.3% and the second largest endowment, the $20.1 billion University of Texas System, Austin, returned 3.2% for the year ended Aug. 31.
This article originally appeared in the January 7, 2013 print issue as, "Top funds find wide range of returns in fiscal year".