Big endowments see solid returns for year

Many of the largest college and university endowments are reporting returns in the low double digits for their fiscal year ended June 30, easily outperforming their year-earlier performance.

“The performance numbers so far have been pretty consistent,” said Mark Brubaker, a Pittsburgh-based managing director of Wilshire Associates.

Among the large endowments that reported for the fiscal year ended June 30: the University of Pennsylvania, Philadelphia, had a 14.4% return and assets of $7.7 billion; Duke University, Durham, N.C., 13.5% and $6 billion; and the University of Virginia, Charlottesville, 13.4% and $5.96 billion, which encompasses the endowment, university-related foundations and university long-term operating reserves.

Also, Yale University, New Haven, Conn., had a return of 12.5% and assets of $20.8 billion; Stanford University, Palo Alto, Calif., 12.1% and $18.7 billion; Harvard University, Cambridge, Mass., 11.3% and $32.7 billion; and the Massachusetts Institute of Technology, Cambridge, 11.1% and $10.86 billion.

Most had returns in the low- to mid-single digits for the fiscal year ended June 30, 2012; Harvard's endowment had a -0.05% return.

Officials at the endowments either declined to discuss their returns or didn't respond to requests for comment.

Returns for the largest endowments are similar to a broader universe of returns as measured by the Wilshire Trust Universe Comparison Service. TUCS reported that the median investment returns for 17 endowments, each with assets of $500 million or more, was 12.39% for the 12 months ended June 30.

“The best performers have been the very big endowments and the very small endowments,” said Christopher Adkerson, a St. Louis-based principal for the endowment consulting firm Mercer Hammond.

The biggest endowments have benefited from “the maturity of their private equity investments,” and the smaller endowments — those with less than $100 million — have done well because of their relatively high exposure to equities during a rising stock market, Mr. Adkerson said.

Endowments between $100 million and $500 million may be experiencing “a delay in returns” as they try to emulate the larger endowments with higher allocations to private equity and other alternatives, he said.

In a preliminary analysis of 56 endowments, each with more than $1 billion in assets, Cambridge Associates found the median return was 11.6% for the fiscal year ended June 30, compared to 0.9% a year earlier.

Harvard's 11.3% fiscal-year return outperformed its benchmark by 223 basis points, according to a September report by Harvard Management Co., Boston, which manages the endowment.

For three years, Harvard's endowment returned an annualized 10.5%, outperforming its benchmark of 9.1% but trailing the 10.91% TUCS median and matching Cambridge's median return of 10.5%.

Over the last five fiscal years, the Harvard endowment has adjusted its allocation, the report said. It shifted to 49% equities from 45%, decreased absolute return to 15% from 18%, adjusted real assets to 25% from 26%, raised high yield to 2% from 1% and lowered fixed income to 9% from 15%.

Consultants say endowment executives wrestle with the role of fixed income. Mr. Brubaker said some endowments are investing in hedge funds as a fixed-income substitute — as well as an equity substitute — and others are adjusting their lineup to include short-duration high-yield bonds, non-performing loans, bank loans or emerging markets debt.

Celia Dallas, Arlington, Va.-based chief investment strategist for Cambridge, said low yields on traditional fixed income are prompting endowments to explore unconstrained bonds, while some are substituting hedge funds to reduce interest rate risk and price risk.

Ms. Dallas added that her firm has noticed “a continued commitment to expanding” private equity and venture capital, especially among endowments that have the most experience and allocations.

Yale's endowment is a pioneer in the use of alternatives, and its allocation to private equity is 31%, according to a Sept. 24 news release. The endowment also has 20% in absolute return, 19% in real estate, 11% foreign equity, 8% natural resources, 6% domestic equity and 5% bonds.

Duke's three-year annualized return was 12.6%, according to investment performance posted on the university's website; that return outperformed the medians for both TUCS and Cambridge.

Duke's target allocation was 49% public and private equity; 13% commodities; 11% private real estate and real estate investment trusts; 13% credit; 5% public obligations, such as Treasuries; and 9% U.S. Treasury inflation-protected securities and non-U.S. inflation linked bonds.

Efforts to diversify using alternative investments can backfire, as officials at the University of Florida Foundation, Gainesville, Fla., learned. The $1.35 billion endowment, managed by the University of Florida Investment Corp., posted a 9.1% return for the fiscal year ended June 30, significantly below its 13.6% benchmark, according to a quarterly report posted on the university website.

For the three years ended June 30, Florida's annualized return of 8.6% trailed the benchmark of 11.9%. It also was below both TUCS' and Cambridge's universes.

The weak returns were “driven by several factors, including the poor relative performance from several managers in the hedge strategies portfolio in the past year, the mismatch between the private equity and natural resources portfolio and its benchmark ... and poor relative performance from the real estate portfolio,” the report said.

Hedge strategies returned 3.4% for the fiscal year, well below the benchmark of 7.3%. “During the year, staff has continued to restructure this portfolio, terminating 10 managers and hiring 10 new managers, which represents about 50% of the portfolio's assets at the end of the period,” the University of Florida's report said.

The endowment's current allocation is 34.4% public equity, 22.7% hedged strategies, 12.9% private equity, 11.4% natural resources, 8.6% real estate, 8.3% fixed income and 1.7% cash, the report said. n