Washington - Larger endowment funds outperformed smaller ones last year, but college and university funds dropped in value for the second year in a row, according to the annual study by the National Association of College and University Business Officers.
There is a "strong correlation" between fund size and performance, the study by the Washington-based organization said. Endowment funds with assets of $1 billion or more had an average investment loss of 3.8% for the year ended June 30, compared with losses of 6.1% for endowments with $101 million to $500 million in assets, and losses of 6.6% for funds with less than $25 million.
The difference between large and small endowments shows up more dramatically in the study's three-year performance tables. Endowments with more than $1 billion in assets had an average three-year investment gain of 5.6%, while endowments with $25 million to $100 million in assets had a three-year return of -0.6%, and those with less than $25 million, -1.1%.
Larger funds were helped by having bigger exposures to non-traditional asset classes, according to the survey. Endowments with assets of more than $1 billion held an average of 17.8% of total assets in hedge funds, 4.3% in private equity and 3.9% in venture capital. Funds with $501 million to $1 billion in assets had an average of 11.4% in hedge funds, 3.5% in private equity and 2.4% in venture capital; and endowments with $25 million to $50 million in assets averaged only 3.2% in hedge funds, 0.3% in private equity and 0.3% venture capital.
Equities trending down
The largest endowments had an average of 67.5% of their portfolios invested in traditional equities, fixed income and cash, while the smallest institutions had an average 91% allocated to those asset classes. The percentage of equities overall has been trending downward, representing an average of 57.4% of endowment assets in 2002, vs. 64.3% in 1999, according to the survey.
College and university endowment funds lost an average 6% of their value in for the 12 months ended June 30, continuing a losing streak that started a year earlier, according to the NACUBO survey. That follows a 3.6% drop in value in 2001 and marks the first time endowments have lost value two consecutive years since the survey was first published in 1974. The two-year drop in asset value breaks a string of gains that started in 1985.
The message, said NACUBO senior fellow David Lyons in his introduction to the study, is to "get used to lower returns for the foreseeable future and realize that you'll need to work harder for them."
Declines in asset value for the 12 months ended June 30 were the rule among the 654 institutions participating in the 2002 study.
NACUBO officials cautioned that the declines were not due to market results alone but were also the result of expenditures and withdrawals. The average spending rate among the survey respondents was 5.3% compared with 5.1% in 2001, 5% in 2000 and 4.9% in 1999.
Louis R. Morrell, vice president and treasurer for Wake Forest University, Winston-Salem, N.C., said significant allocations to alternative asset classes clearly benefited larger endowments, which are willing to accept the additional risk. In fact, he said, the amounts shown in the survey may be "understated" because institutions may have made commitments for which the money has not yet been drawn down.
He said the NACUBO survey asks about only actual investments and not target allocations.
Ideal for alternatives
Contrasting endowments and pension funds, Mr. Morrell said endowments are "ideal" for holding illiquid alternative investments because most are set up "in perpetuity." Endowments are more willing to diversify into alternative asset classes because of their "progressive" nature, vs. the "conservative" mindset of pension fund trustees.
Larger endowments reported better returns in the NACUBO survey because they're more willing to accept additional risk, he added: "The better returns don't mean that they were smarter. It means that they were more risk tolerant."