Aggregate assets of U.S. educational endowment portfolios grew 19.1% in the fiscal year ended June 30 to $346.5 billion from $291 billion the prior year, according to the 2010 NACUBO-Commonfund Study of Endowments released Jan. 26.
Harvard University, Cambridge, Mass., remains the largest U.S. endowment fund, with assets of $27.6 billion as of June 30, up 5.4% from a year earlier, according to a new ranking of endowments that also was released Jan. 26 by the Washington-based National Association of College and University Business Officers.
Yale University, New Haven, Conn., remained in second place with $16.7 billion of assets as of June 30, up 2%, while Princeton University, Princeton, N.J., moved to third from fourth with assets of $14.4 billion, up 14.1%.
The University of Texas System, Austin, was fourth with asset growth of 15.5% to $14.1 billion in the year ended June 30. Stanford University, Palo Alto, Calif., dropped to fifth place from third last year with assets of $13.9 billion, up 9.8%.
The data analyzed in the new study come from 850 U.S. endowments that were surveyed jointly by NACUBO and Commonfund. In 2009, a slightly different universe of 842 institutions participated in the survey. The recalculation of aggregate assets for 2009 based on the 2010 universe of respondents is $317 billion, showing growth of 9.3% in fiscal 2010, said Kenneth Redd NACUBO's director, research and policy analysis, advocacy and issue analysis.
Assets of the majority of U.S. endowment funds still are about 25% lower than they were at the end of fiscal year 2007, said Verne O. Sedlacek, president and CEO of Commonfund, Wilton, Conn., at a news briefing in New York on Jan. 26.
Mr. Sedlacek said the growth of assets in fiscal 2010 was driven to a strong extent by good investment performance.
The average investment return of the universe of 850 endowments was 11.9% in the year ended June 30, up from -18.7% a year earlier, confirmed John D. Walda, NACUBO's president and CEO, at the briefing.
On a one-year basis, by size, endowments larger than $1 billion produced the best average return, with 12.2% as of June 30, followed by institutions with $25 million to $50 million of assets, which had an average return of 12%.
Over the three years ended June 30, U.S. endowment returns still were negative, with an average return of -4.2% for the three years ended June 30. Average returns went back into positive territory with 3% over five years and 3.4% over 10 years, according to the study. Multiyear returns are annualized and net of fees.
Volatility was fairly high across the 10-year span ended June 30, Mr. Walda said, drawing attention to a chart in his presentation that offered year-by-year comparisons of the average one-year returns of endowments in the survey. In the fiscal years ended June 30, for example, in 2001, the average return was -3.54%; 2002, -6.25%; 2003, 3.2%; 2004, 15.3%; 2005, 9.3%; 2006, 10.8%; 2007, 17.2%; 2008, -3.0%; 2009, -18.7%; and 2010, 11.9%.
Despite strong average performance in the most recent fiscal year “endowment returns still are not sufficient to meet the needs” of their sponsoring institutions, Mr. Walda said. “An investment return of 3.4% over 10 years won't preserve endowment assets over the long-term,” considering the possibility of rising inflation in future and an average target endowment spending rate of 5%, Mr. Walda added.
“Though 2010 was an excellent year in terms of performance, not all endowments are out of the woods yet,” Mr. Sedlacek agreed.
The average asset allocation for all endowments surveyed did not change dramatically in the year ended June 30, with domestic equities at 15%; fixed income, 12%; international equities, 16%; alternatives, 52%; and cash and short-term securities, 5%.
However, over a slightly longer time frame — since the market crisis of 2008 — endowment chief investment officers have been taking steps to reduce the volatility of their portfolios.
For example, Mr. Sedlacek noted that the four-percentage-point increase in the average allocation to cash to 5% in fiscal year 2010 from 1% in 2008 was significant, especially since cash tends to be a drag on overall portfolio performance. He considered this a sign that CIOs and boards of trustees are concerned about maintaining liquidity in their portfolios.
As part of the move to minimize volatility, endowment CIOs also reduced their domestic equity exposure eight percentage points as of June 30, from 23% as of June 30, 2008, and international equity dropped two percentage points from 18% over the same time frame.
Adding more alternatives, and hence more diversity, was another means of cutting volatility, Mr. Sedlacek said, pointing to the six-point increase to an average 52% allocation as of June 30 from 46% on June 30, 2008.
Mr. Walda said by making these investment management changes, endowment CIOs who “faced what probably was the biggest challenge of their careers in surviving the market crisis” have “come out of the tunnel and on the other side, they now have tools to cope better” with future market crises.
Endowment investment officers did do a good job when it came to producing strong returns by asset class, Messrs. Walda and Sedlacek said.
Only one asset class was negative in the year ended June 30; that was a subclass within the alternatives category — private equity real estate (non-campus) — with an average return of -15.8%, according to the study results.
Other average asset class one-year returns of all endowments as of June 30 were domestic equity, 15.6%; fixed income, 12.2%; international equities, 11.6%; alternatives, 7.5%; and cash and short-term securities, 2.7%.
A breakdown of average one-year returns of the alternatives category as of June 30 (excluding private equity real estate, mentioned above) were private equity, 14.1%; marketable alternatives (including hedge funds, absolute return, etc.), 9.9%; venture capital, 9.6%; energy, natural resources, commodities and managed futures, 13.2%; and distressed debt, 24.6%.