Smaller endowments outgain big brothers
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February 03, 2014 12:00 AM

Smaller endowments outgain big brothers

Roaring equities, alternatives allocations make for strong year overall

Christine Williamson
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    NACUBO and Commonfund
    Assets: $7.9 billion
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    Assets: $8.2 billion
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    Assets: $8.7 billion
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    One-year return: 12.7%10-year return: 10.1%Assets: $22.7 billion
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    Assets: $20.7 billion
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    Even in a bang-up year for endowment returns, the largest U.S. college and university funds were for the most part outflanked by the higher fiscal year-end returns of their smaller brethren.

    Pensions & Investments delved into endowment performance, finding fiscal-year returns for 48 of the 80 U.S. endowments with at least $1 billion in assets in the NACUBO-Commonfund Study of Endowments.

    Bowdoin College returned 16% for the fiscal year ended June 30, the best among U.S. endowments with at least $1 billion in assets, according to analysis by P&I.

    In fact, Bowdoin's endowment topped the $1 billion mark for the first time, with $1.039 billion, ranking the Brunswick, Maine-based college 81st in the 2013 NACUBO-Commonfund survey.

    By contrast, the $32.3 billion endowment of Harvard University, Cambridge, Mass., was the largest in the survey by a wide margin, but its 11.3% one-year return was 35th in P&I's returns-based ranking of large U.S. endowments. That's below the 11.7% average net return for the NACUBO-Commonfund universe of 835 U.S. endowments. (June 30 is the most common fiscal year-end date for educational institutions.)

    The overall strong 2013 return was “a positive trend” after the -0.3% average net return reported for the fiscal year ended June 30, 2012, Verne O. Sedlacek, president and CEO of Commonfund, Wilton, Conn., said during a Jan. 27 teleconference press briefing.

    Aggregate assets of U.S. endowments rose 11.7% for the year ended June 30, to $448.6 billion, according to the survey.

    Investment returns spanned 940 basis points, from Bowdoin's 16% to 6.6% for the $6.7 billion University of Chicago. UC was the 13th largest fund in the NCSE ranking and dead last among the 48.

    After Bowdoin, the five best-performing large U.S. endowments for the year ended June 30 were:



    • UCLA Foundation, Los Angeles, with a 15.2% return for its $1.5 billion endowment;

    • Williams College, Williamstown, Mass., 14.8% for the $2 billion endowment;

    • University of Pennsylvania, Philadelphia, 14.4% for the $7.7 billion endowment; and

    • University of Oklahoma, Norman, 14.3% for the $1.3 billion endowment.

    'Complete reversal'

    Oklahoma's annualized three- and five-year returns (11% and 4.9%, respectively) were “very strong, a complete reversal from the previous five-year returns and the culmination of five years of a redesign process,” said Benjamin C. Stewart, director, investments.

    Mr. Stewart and the foundation's investment committee started a top-to-bottom overhaul of the endowment from governance to investment management in 2008. The result is a more flexible asset allocation that allows the small investment staff to shift assets more dynamically.

    For example, public equity accounted for 45% and was instrumental in achieving the strong one-, three- and five-year returns as of June 30, Mr. Stewart said.

    “Our peers trimmed their equity allocations about a year early. We stayed the course and were rewarded in fiscal 2013. Asset allocation and active management really paid off for us,” Mr. Stewart said. Mr. Stewart said the public equity allocation now is being cut, but he didn't say by how much.

    Even in a very strong global equity market, OU's public and private equity managers “added a lot of alpha over the benchmarks” in the fiscal year, as did hedge fund managers. OU Foundation has a 25% allocation to hedge funds.

    Another source of alpha was the opportunistic category, which was “only a 2% slice of the portfolio, but added meaningfully to returns,” Mr. Stewart said. Invested in residential mortgage-backed securities, the small allocation returned 69% in the year ended June 30, contributing 140 basis points to the overall fund return.

    Rounding out OU's asset allocation are 10% allocations each to inflation-hedged and deflation-hedged strategies and an 8% allocation to private investments.

    Joining University of Chicago at the bottom of P&I's performance ranking were the $20.4 billionUniversity of Texas, Austin, with a 9% return, and the $1.4 billion University of Florida Foundation, Gainesville, and $2.9 billion New York University, each with 9.1%. The $3.7 billion endowment of Vanderbilt University, Nashville, Tenn., returned 9.3% for the fiscal year ended June 30.

    Despite the wide spread among individual endowments, on average, the range of returns by fund size across the universe was quite narrow, said Christopher C. Adkerson, principal and co-lead of the endowment segment at investment consultant Mercer Hammond, St. Louis.

    In fact, the average net return of the tiniest endowments in the survey matched that of funds with more than $1 billion — 11.7% for the year ended June 30, NACUBO-Commonfund data showed.

    Mr. Adkerson said only 60 basis points separate the highest and lowest average one-year net returns for other size categories: 12%, for those with $501 million to $1 billion in assets; 11.9%, $101 million to $500 million; 11.5%, $51 million to $100 million; and 11.4%, $25 million to $50 million.

    The lack of dispersion among returns is the result of the endowment world's “wholesale adoption of the endowment model — higher alternative allocations, lower public market exposure. Back in the '80s, the early adopters of the model looked much different from everyone else,” Mr. Adkerson said.

    But “asset allocation is looking more and more alike across the full endowment universe and that has resulted in really tight spreads,” he said.

    While $1 billion-plus endowments had an average allocation of 59% to alternatives and 30% to domestic and international equity, the less-than $25 million endowments had just 11% on average invested in alternatives and 57% in all equities.

    High alternative investment allocations drove the biggest funds to their high net average return, but old-fashioned equity beta returns were “the big advantage for small plans. Strong equity returns made up for lower returns in other asset classes,” Mr. Adkerson said.

    The Standard & Poor's 500 index returned 20.6% and the MSCI ACWI index, 17.3%, in the 12 months ended June 30.

    Within the public equity markets, higher exposure to domestic equities “really helped returns” as the U.S. economy continued to recover in the fiscal period, said Monica Issar, managing director and global head of endowments and foundations, J.P. Morgan Asset Management, New York.

    But “manager alpha really made the big difference in alternative asset classes in fiscal year 2013,” Ms. Issar said, noting for example, that the number of private equity distributions was up and payouts by individual funds generally were higher than in previous years.

    Endowment officials also were more willing in fiscal 2013 to invest in more complicated strategies than in previous years, such as non-U.S. private equity, Ms. Issar said.

    By size, after Harvard, the largest U.S. endowments as of June 30 were:



    • Yale University, New Haven, Conn., $20.8 billion;

    • University of Texas System, Austin, $20.4 billion;

    • Stanford University, Palo Alto, Calif., $18.7 billion; and

    • Princeton University, Princeton, N.J., $18.2 billion.

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