Smaller endowment funds out perform bigger ones so far this year

University of Minnesota endowment takes bragging rights with top return for fiscal year

Stuart Mason
Stuart Mason said good venture capital and equity returns are among reasons for the gain.

The smallest of the U.S. universities that have so far reported fiscal year returns for their endowments — University of Minnesota — notched up the biggest return at 20.4%.

The $1.3 billion endowment of University of Minnesota edged out the 20.1% return of the $23.9 billion endowment of Yale University and the 20.1% return of Duke University's $7 billion endowment for the year ended June 30, the most common fiscal year-end date for long-term educational funds.

Returns of the Minneapolis-based endowment were well above those of the two largest U.S. endowments. For the year ended June 30, Harvard University's $36.4 billion endowment returned 15.4%, placing it close to the bottom of Pensions & Investments' ranking. The 15.9% return of the $33.9 billion endowment of the University of Texas System merited a 15th place ranking.

The pace of fiscal year-end performance reporting by U.S. endowments is notoriously erratic. As of P&I's Oct. 9

print deadline, only 20 notable endowments with more than $1 billion in assets had publicly announced returns. Three of those educational establishments did not disclose the size of their endowment pools.

“The colleges and universities that have reported returns so far are the ones that did well. We probably won't see the results of the endowments that fared poorly until the end of this year at earliest,” quipped an industry observer who asked not to be named.

“The Ivy Leaguers and the largest institutions tend to engage more in competitive return comparison — they take full advantage of bragging rights — than the other endowments and thus, tend to be among the earliest reporters,” said the source.

P&I analysis of returns available so far shows that large U.S. endowments enjoyed an extremely good 2013-"14 fiscal year.

“The best news about the past fiscal year is that when endowments post up double-digit returns, they are likely hitting their return goals,” said Russ LaMore, a senior consultant who works with endowments and foundations from Mercer Investments' St. Louis office.

Most university endowments are aiming for an annual real return between 4% and 5%, Mr. LaMore said, citing data from the most recent NACUBO- Commonfund Study of Endowments, which is based on June 30, 2013, survey data.

Returns for the 20 funds that have reported so far ranged from 20.4% to 12.7% for the year ended June 30. The average one-year return was 17.5%, more than 570 basis points above the 11.8% average return for the period ended June 30, 2013.

Aggregate assets of the same universe of endowments grew 15% to $196.5 billion in the year ended June 30.

Once all of the fiscal year 2014 endowment returns are factored in, Mercer's Mr. LaMore expects them to form a return barbell.

“Stocks did very well during this one-year period — U.S., international, small-cap, etc. — and I think that the smallest tranche of endowments, those $100 million or less, likely did very well because of their typically heavy public equity weighting,” Mr. LaMore said.

For the 12 months ended June 30, the Standard & Poor's 500 stock index returned 24.6%; MSCI All Country World index, 23.7%; and the Barclays Capital U.S. Aggregate bond index, 4.4%.

The opposite end of the barbell likely will be dominated by large educational funds with at least $750 million of assets that benefited not only from public equity exposure but also from private investments, especially energy funds, Mr. LaMore said.

Declining to name names, Mr. LaMore said a number of the largest endowments have “a lot of leverage” in their portfolios that significantly amped-up portfolio returns.

Endowments between $100 million and $750 million are very likely to end up in the straight part of the barbell with “substantially lower returns,” Mr. LaMore said. That's because these midsize endowments likely are still working toward meeting private market investment targets and haven't begun to harvest strong returns from alternative asset classes.

The strong performance of the University of Minnesota's endowment is due to its private capital and public equity asset class overweighting, said Stuart Mason, chief investment officer.

The portfolio was overweight its 20% private capital target allocation, specifically in venture capital, which drove about three-quarters of the fiscal year's returns. The endowment also benefited from being slightly overweight on its 30% public equity allocation, he said.

Net of fees, the endowment's private capital returned 31.4% for the fiscal year vs. 18.6% for its custom benchmark, according to the university's board of regents website. Public equity returned 23.5% vs. the benchmark's 23.4%.

In addition, “our smaller size is an advantage,” Mr. Mason said. In venture capital, where early-stage fund size caps tend to be much smaller than those of private equity funds, the $5 million to $10 million commitments Minnesota can afford are easily accommodated, “unlike Yale, which has to put $40 million or more to work to make a difference,” Mr. Mason said.

Investment staff of other early reporting endowments explained both positive and negative asset class contributions to their June 30 fiscal year-end returns:

nHarvard University's private equity investments returned 20.3% and public equities produced 20.4%, with both asset classes trailing the 21.6% return of their respective benchmarks. Foreign equities dragged the public equity return down relative to the benchmark, while the 73% of the private equity portfolio that was composed of commitments to 2004 to 2008 vintage year funds were “substantially underperforming,” according to the endowment's annual report.

nStanford University's merged pool, which includes its $21.4 billion endowment, returned 17%, with U.S. public and private equity markets, particularly venture capital, significant contributors, said a release from Stanford Management Co., which invests the university's assets;

nUniversity of Pennsylvania's $9.6 billion endowment returned 17.5% for the fiscal year ended June 30, also buoyed by public and private equity, figures from the university showed;

nUniversity of Virginia's $6.9 billion long-term pool returned 19% in the fiscal year ended June 30, pumped up by asset class returns of private equity, 35.3%; real assets/natural resources, 27.1%; public equity, 26.8%; and real estate, 14.7%, said the annual report of University of Virginia Investment Management Co.; and

nBrown University's $3.2 billion endowment returned 16.1%, with equity-like credit and public and private equity providing the biggest boosts, said Mark Nickel, a university spokesman.

P&I staff reporter Rick Baert and Bloomberg contributed to this story.

This article originally appeared in the October 13, 2014 print issue as, "Small fund takes bragging rights with top return for fiscal year".