NACUBO-Commonfund: U.S. endowments dip 0.5% in year

Aggregate assets of 831 U.S. educational endowments declined by a slight 0.49% in the fiscal year ended June 30 to $406.1 billion compared to $408.1 billion the prior fiscal year, according to 2012 NACUBO-Commonfund Study of Endowments released Friday.

Harvard University maintained its perennial position as the largest U.S. endowment fund in 2012 with $30.4 billion, followed by its constant companions at the top of the charts, Yale University with $19.3 billion and University of Texas System with $18.3 billion, all as of June 30.

Bucking recent history, however, assets of both Cambridge, Mass.-based Harvard and New Haven, Conn.-based Yale, declined in the year ended June 30.

Harvard's assets dropped 4.1% in the fiscal year ended June 30 and Yale's endowment assets were down a very slight 0.1%. The 2012 declines are in sharp contrast to the 15.1% pop in Harvard's assets and the 16.3% growth for Yale in the prior fiscal year ended June 30, 2011.

With asset growth of 6.5% in the fiscal year, University of Texas System, Austin, on the other hand, was among only nine of the 25 largest endowments in NACUBO-Commonfund's 2012 universe that experienced asset gains in the fiscal year ended June 30, with growth of 6.5%.

Texas A&M University System & Foundation, College Station, for example, experienced the highest growth of the 25 largest endowments — 9.1% — in the year ended June 30 to $7.6 billion, followed by Massachusetts Institute of Technology, Cambridge, which ended with $10.1 billion of endowments, up 3.2% from the prior year.

Among the 25 biggest endowments in the NACUBO-Commonfund study, only University of California, Oakland, experienced a larger decline in assets — down 6% to $5.962 billion — than Harvard in the year ended June 30.

Although the NACUBO-Commonfund study has a 94% repeat participation rate, in 2011, a smaller and slightly different universe of 823 institutions responded to the survey, said William F. Jarvis, managing director of the Commonfund Institute, the research and education arm of money manager Commonfund, Wilton, Conn., in an e-mail.

The recalculation of the aggregate assets of the 779 endowments that participated in both the 2012 and 2011 surveys was $402.7 billion in 2012 and $404.7 billion for 2011, a decline of 0.49% for the 12 months ended June 30, Mr. Jarvis wrote.

Investment performance was the primary reason for the decline in assets of many of the endowments surveyed jointly by the National Association of College and University Business Officers, Washington, a professional association, and the Commonfund Institute.

The average return of the full universe was -0.3% for the fiscal year ended June 30, compared to 19.2% for fiscal year 2011. The average returns of the whole NCSE survey group for June 30 fiscal year-ends in 2010 and 2009 were -18.7% and -3%, respectively.

Split by size, the survey showed average fiscal year-end June 30 returns of endowments as:

• $1 billion-plus, 0.8%;
• $501 million to $1 billion, 0.4%;
• $101 million to $500 million, -0.7%;
• $51 million to $100 million, -1%;
• $25 million to $50 million, -0.5%;
• Less than $25 million, 0.3%.

Average one-year returns by asset class for the entire universe were domestic equities, 2%; fixed income, 6.8%; international equities, -11.8%; alternatives, 0.5%: and cash/other, 0.2%.

Over the three-year period ended June 30, 2012, the average return for the full survey group was 10.2%; for five years, 1.1%; and for 10 years, 6.2%.

All return data are as of June 30, net of fees and annualized for multiyear periods.

Although the 6.2% return of the full NCSE universe over the 10-year period ended June 30 was positive and better than the 5.3% return for the Standard & Poor's 500 index, “universities have lost ground because of inflation,” said John D. Walda, NABUCO's CEO and president, during a pre-release news conference about the study on Thursdaymorning.

The average performance goal for the full NCSE universe was 7.4% for the fiscal year ended June 30, said Verne Sedlacek, Commonfund's president and CEO, during the news conference.

Mr. Walda noted that to meet the long-term goal of growing the endowment at the rate of inflation and meeting annual spending targets of 4% to 5% of endowment assets, endowment chief investment officers “really need to achieve an annual return of about 8.3%.”

Compared to fiscal year 2011, the average asset allocation for the total NCSE universe was little changed in 2012 with domestic equities down one percentage point to 15%; fixed income up one percentage point to 11%; international equities down one percentage point to 16%; alternatives up one percentage point to 54%; and cash/other steady at 4%.

Asset allocation was critical to performance for endowments of all sizes in the year ended June 30, Mr. Sedlacek said.

Given the strong 6.8% average net return of fixed-income strategies for the year ended June 30, for example, Mr. Sedlacek said the one-percentage-point increases to the asset class by endowments with $501 million to $1 billion and $101 million to $500 million, to 12% and 16%, respectively, helped performance.

Endowments with $51 million to $100 million and $25 million to $50 million, on average raised their fixed-income allocations two percentage points to 22% and 24%, respectively, and the smallest institutions with assets of less than $25 million, raised the average allocation to fixed income to 29% from 25% at the expense of allocations to cash.

Hedge funds “had a terrible year in 2012,” with a -1.2% return for the 12 months ended June 30 which hurt returns of the smaller end of the study's endowment universe, Mr. Sedlacek said.

That's because on average, the portfolio weighting to hedge funds was 36% for the entire universe and just 33% for endowments with more than $1 billion, but allocations to hedge funds rose exponentially as endowment size dropped: $501 million to $1 billion, 43%; $101 million to $500 million, 50%; $51 million to $100 million, 52%; $25 million to $50 million, 58%; and less than $25 million, 62%.

“People are asking the question, whether hedge funds are worth the cost. There haven't been massive outflows in response to a one-year event, but people are thinking about it,” Mr. Sedlacek said.