Investing

Large endowments struggled with returns in fiscal 2016

William Jarvis
William F. Jarvis believes lower returns plus increased spending were behind the asset drop.

U.S. and Canadian endowments are struggling after producing the worst average annual return since the financial crisis low point resulting in an aggregate asset drop of 2.6%.

The 2016 NACUBO-Commonfund Study of Endowments tells a tale of woe for more than three-quarters of the 805 institutions that provided asset and performance data as of June 30, the end of the fiscal year for most colleges and universities.

Endowment assets totaled $515 billion as of June 30, the data showed. The 2.6% decline in aggregate endowment assets is well below the 2.5% increase in assets in fiscal year 2015 and the 15% growth in fiscal year 2014.

The average one-year return for the study's universe was -1.9% net of fees, the worst since the average -18.7% for the year ended June 30, 2009.

Endowments and foundations had positive average annual returns in all but one of the first six fiscal years of this decade: 2.4% in 2015; 15.5% in 2014; 11.7% in 2013; -0.3% in 2012; 19.2% in 2011; and 11.9% for 2010.

“This year's results are cause for concern. Continued below-average investment returns will undoubtedly make it much more difficult for colleges and universities to support their missions in the future,” said John D. Walda, president and CEO of the National Association of College and University Business Officers, Washington, in a joint news release with Commonfund Institute, Wilton, Conn.

The average one-year return as of June 30 for the 770 endowments that participated in both the 2016 and 2015 surveys was -2% net of fees vs. 2.4% as of the same date in 2015.

The largest U.S. endowments
As of June 30, 2016. Assets are in millions.
RankInstitutionAssetsChange
from 2015
One-year
return
1 Harvard University$34,541-5.2%-2.0%
2 Yale University$25,409-0.6%3.4%
3 University of Texas System$24,2030.5%-0.7%
4 Stanford University$22,3980.8%-0.4%
5 Princeton University$22,153-2.5%0.8%
6 Massachusetts Institute of Technology$13,182-2.2%0.8%
7 University of Pennsylvania$10,7155.7%-1.4%
8Texas A&M University Sys. & Foundations1$10,5400.6%N/A
9 University of Michigan$9,743-2.1%-1.4%
10 Northwestern University2$9,648-5.3%1.9%
11 Columbia University$9,041-6.2%-0.9%
12 University of Notre Dame$8,374-2.3%-0.3%
13 University of California$8,3414.3%-3.4%
14 University of Chicago$7,001-7.3%-1.9%
15 Duke University$6,840-6.3%-2.6%
16 Washington University in St. Louis$6,462-5.2%-3.2%
17 Emory University2$6,402-4.2%1.9%
18 University of Virginia$5,852-5.3%-1.5%
19 Cornell University$5,758-4.6%-3.3%
20 Rice University$5,324-4.2%0.2%
21University of Southern California$4,609-2.1%-2.1%
22 Dartmouth College$4,474-4.1%-1.9%
Total$261,010-2.2%
Notes: 1 Returns are included with University of Texas System. 2 As of fiscal year-end Aug. 31, 2016.
Source: Data - NACUBO- Commonfund Study of Endowments; returns from university financial reports

“The results of the NCSE survey are no surprise if you consider capital market returns,” said Kenneth Shimberg, Boston-based chief investment officer of Mercer Investments' endowment and foundation practice. “It's not that endowments were doing anything wrong with their asset allocations, but investor returns are driven by capital market returns,” Mr. Shimberg added. “Endowments that were invested globally in equity and light on U.S. fixed income were hurt relative to U.S.-oriented investors.”

Performance of major markets for the 12 months ended June 30 support Mr. Shimberg's reasoning: the Standard & Poor's 500 index returned 4%; Russell 3000, 2.1%; MSCI World ex-U.S., -9.8%; Barclays U.S. Aggregate Bond, 6%; and Commonfund Higher Education Price index, 1.8%.

Further light

Stacking up the components of the study universe's one-year average return sheds further light on the asset decline:

nThe dollar-weighted average asset allocation was U.S. equity, 16%; non-U.S. equity, 19%; fixed income, 8%; alternatives, 53%; and cash, 4%. The allocation changed very little from the prior year.

nAverage one-year net returns by asset class were U.S. equities, -0.2%; non-U.S. equities, -7.8%; fixed income, 3.6%; alternatives, -1.4%; and cash, 0.2%.

nSeventy-four percent of endowments increased their spending rate to an average 4.3%.

Low returns and higher spending were the primary drivers of the decline in aggregate assets, said William F. Jarvis, executive director, Commonfund Institute, during a conference call with reporters.

Nearly 80% of the study's universe, or 635 educational endowments, experienced declines in fiscal year 2016 while 20% grew; six pools were unchanged. In the prior fiscal year, 64% of study participants reported endowment growth, 35% saw asset declines and 1% reported no change.

“As in fiscal 2015, this year's long-term average returns figure is well below the median 7.4% that most institutions report they need to earn in order to maintain their institution's mission,” said the NACUBO- Commonfund release.

Multiyear average annualized returns of the universe also were down sharply, with 5.2% for the three years (2015, 9.9%); five years, 5.4% (2015, 9.8%); and 10 years, 5% (2015, 6.3%). All returns are net of fees.

“A low-return environment could very well persist in the near term, making it more challenging to achieve returns that keep pace with an endowment return hurdle of inflation plus spending, which require returns to be better than 7% to 8% over the long run,” said Michael Karris, president of EndowBridge Capital LLC, Princeton, N.J.

In response, many endowment investment committees are adjusting their expected rates of return downward and are working with university administrations to lower spending rates.

“A 5% average annualized return over 10 years is much too low to meet spending rate expectations,” stressed Commonfund Institute's Mr. Jarvis.

Endowment and finance departments at many educational institutions are having “meaningful conversations” about reducing both expected rates of return and spending levels because current performance expectations might be too high, said Mercer's Mr. Shimberg.

Not immune

Most of the five-largest endowments on the NACUBO- Commonfund study ranking were not immune from 2016's performance pain. Many of these institutions and others on the list of the 25-largest endowments saw asset declines and negative or very low positive performance for the fiscal year.

The endowment of Cambridge, Mass.-based Harvard University, the study's perpetual No. 1, saw assets decline 5.2% to $34.5 billion after a disappointing -2% return for the fiscal year. Poor investment returns have pushed Harvard Investment Management Co., Boston, manager of the university's endowment, to restructure its investment operations.

Following Harvard, Yale University's endowment returned 3.4% while assets declined 0.6% to $25.4 billion; the University of Texas System returned -0.7% and assets rose 0.5% to $24.2 billion; Stanford University returned -0.4%, and assets increased 0.8% to $22.4 billion; and Princeton University returned 0.8% and its assets fell 2.5% to $22.2 billion.

Endowment asset data is from the NACUBO- Commonfund study; return data was gathered from university financial reports.

Mr. Jarvis noted one bright spot within the study results: The very smallest endowments with less than $25 million in assets returned -1% net of fees, relatively better than institutions many times larger. Tiny endowments tend to have a higher allocation to fixed income, which benefited from strong returns during the fiscal year, Mr. Jarvis explained on the conference call.

The average asset allocation of those small endowments as of June 30 was U.S. equity, 44%; non-U.S. equity, 15%; fixed income, 24%; alternatives, 10%; and cash, 7%, according to the study.

By contrast, the average asset allocation of the largest endowments with more than $1 billion was U.S. equity, 13%; non-U.S. equity, 19%; fixed income, 7%; alternatives, 58%; and cash, 3%.

This article originally appeared in the February 6, 2017 print issue as, "Large endowments struggled with returns in fiscal 2016".