Top-performing endowments are widening the gap between their returns and the overall median return thanks primarily to greater allocations to private investments, said a new report from Cambridge Associates.
According to the report, among the Cambridge Associates universe of 453 foundations and college and university endowments, the 174 institutions that allocated 15% or more to private investments had a median return of 3.6% for fiscal year 2015 compared to a median return of 1.3% for the entire universe.
The 132 institutions who allocated between 5% and 15% to private investments had a median return of 1.1%, while the 147 institutions that allocated less than 5% to private investments had a median return of -0.1%.
Over the 20-year period, according to the report, endowments with more than 15% allocated to private investments outperformed those with fewer than 5% by 180 basis points per year.
Philip Walton, president of Cambridge Associates, said in a telephone interview that the outperformance of those endowments with more than 15% allocated to private investments, is “true across almost all time periods.”
“In terms of why this is important, first and foremost, certainly in a low growth environment, a simple stock and bond (allocation) is less likely to get investors the returns they need,” Mr. Walton said. “Private investments provide a proven solution to that.”
The report also shows a surprising number of the 174 endowments with more than 15% in private investments have relatively low assets. Of that group, 48 have less than $500 million in assets and 26 have less than $250 million.
“I think that smaller endowments are recognizing that the large private allocation advantage is just as available to them as it is to the big guys,” said Mr. Walton. “There are a large number of very attractive managers who raise funds of $500 million or less. It means that commitment minimums are lower and very available to smaller investors.”
The report is available on Cambridge’s website.