Given their decades-long investment horizons, “one-year returns are nearly meaningless” for endowments, said Kenneth Shimberg, the Boston-based chief investment officer of Mercer Investments' endowment and foundation practice.
“One of the advantages of managing an endowment is a pure investor mindset. We do things very long term and don't worry too much about a single bad year,” said Scott Malpass, CIO of the $10.4 billion endowment of University of Notre Dame, South Bend, Ind. The endowment was down 0.3% for the year, earning the No. 8 spot in P&I's current ranking. The university's annualized return was 8% for the 10 years and 11.3% for the 20-year period.
Like Notre Dame, all other endowments in P&I's universe providing data had positive returns for longer periods, with a 6.5% average for the 10 years and 9.7% for the 20 years.
Annualized 10-year returns of 29 institutions in P&I's list ranged from a high of 8.5% for both the $1.3 billion endowment of Bowdoin College and the $7.6 billion University of Virginia to 3.7% for Ohio State.
The spread of annualized 20-year returns was led by Yale's endowment with 12.6%, while the $1.2 billion University of Kentucky endowment took up the rear with 4.7%. Of the 13 endowments providing figures to P&I, all had at least $2 billion in assets except for University of Kentucky.
Average annualized returns of P&I's universe topped returns of Cambridge Associates' broader universe, which were 4.97% for 10 years and 7.54% for 20 years.
What is sobering for CIOs and investment committees is the difficulty many endowments have had — and will continue to have — in meeting their assumed rate of return over shorter periods between one and 10 years. P&I's review of university financial reports found that the objectives for most institutions is a real return of 5% over inflation as measured by the Higher Education Price index or the Consumer Price index.
For example, over the 12 months ended June 30, the HEPI inflation-adjusted benchmark return was 8.1%, while the CPI was 6.1%. None of the endowments on P&I's list matched the one-year return, but many use annualized returns over rolling five- or 10-year periods as their benchmark.
For 10 years, the benchmark return calculated using CPI was 6.8%, which was matched or exceeded by 11 endowments in the P&I ranking. No endowments matched or topped the 10.1% benchmark HEPI return.
Endowments were more successful in the 20-year period. All but one of the 13 endowments topped the 7.3% CPI benchmark return, and six funds matched or exceeded the 10.7% HEPI benchmark.