Strong equity markets and smart asset allocation helped U.S. endowments recover from what was a dismal fiscal 2016.
But industry observers noted investment teams must remain vigilant if they want to maintain those strong returns. All 43 funds tracked by Pensions & Investments had positive returns for the fiscal year ended June 30, with all but two — Harvard University and University of Minnesota — posting double digits.
"It was a good year. They've had a couple of struggling years, so they needed a good year," said Heather Myers, a partner, non-profit practice leader at Aon Hewitt Investment Consulting, Boston.
Ms. Myers noted smart asset allocation and strong equity markets were major drivers of performance for endowments in fiscal year 2017.
Those universities that had global and/or emerging markets equities did well, she said; even some of the riskier fixed income strategies were strong. But it wasn't all just asset allocation. Manager selection also played a role well this past fiscal year. "All those absolutely contributed," Ms. Myers said.
Kenneth Shimberg, U.S. endowment and foundations chief investment officer for outsourced CIO services at Mercer Investments, Boston, agreed. "U.S. endowments and foundations had a very strong fiscal year, one of the strongest in recent years as risk assets had tremendous performance," he said.
Defensive assets had a weaker year, said Mr. Shimberg. The bond market was marginally down, but because endowment portfolios tend to be light on traditional fixed income, this wasn't much of an issue. "It was a year when traditional long only equities were the driver of returns," said he said.
One-year returns for fiscal 2017 ranged from 18.8% for the $1.9 billion endowment of Grinnell College, Grinnell, Iowa, to 8.1% for Harvard's $37.1 billion endowment. By contrast, the returns of more than 80% of the 31 funds tracked by P&I were negative for the fiscal year ended June 30, 2016, ranging from 3.4% to -3.4%. (See P&I's universe of endowments and their returns at www.pionline.com/endowments.)
Although an exact figure was not immediately available, Grinnell's endowment outperformed its performance benchmark. By asset class, most returns were in the double digits. Distressed debt returned 27.4%; public equities, 25.2%; hedge funds, 19.5%; private equity, 18.5%; growth equity, 17.9%; venture capital, 9.7%; and real assets, 8.5%.
The average 12-month return for the large U.S. endowments in P&I's universe as of June 30 was 13.2%, vs. -1% for the prior year. The median return was 13.4% this year.
The Wilshire Trust Universe Comparison Service reported that the one-, five- and 10-year average returns for all endowments were 11.5%, 7.7% and 5%, respectively. Meanwhile, TUCS reported that the one-, five- and 10-year average returns for endowments with more than $500 million were 13.6%, 8.7% and 5.2%, respectively.