updated with correction
Asset allocation continues to drive returns for U.S. endowments, as industry experts agreed that those with healthy exposures to U.S. equities and alternatives allocations topping 30% performed well during the most recent fiscal year.
All 27 $1 billion-plus endowments tracked by Pensions & Investments so far had positive returns for the fiscal year ended June 30, with all but six posting double digits.
"There's a lot of good news all around. Most endowments produced absolute returns that exceeded their long-term investment objectives," said Kenneth Shimberg, U.S. endowment and foundations chief investment officer at Mercer Investments, Boston. "The asset allocations of these endowments are very telling as to what the returns are."
One-year returns for fiscal 2018 ranged from 15.7% for the $1.6 billion endowment of Bowdoin College, Brunswick, Maine, to 7.7% for Columbus-based Ohio State University's $5.2 billion endowment.
Endowments far outperformed public pension funds in the year. The median 12-month return for the large U.S. endowments in P&I's universe as of June 30 was 11.3%, vs. 13.2% the year before. By comparison, the median one-year return of the 58 pension plans tracked by P&I was 8.98%.
Heather Myers, a partner, non-profit practice leader at Aon Hewitt Investment Consulting, Boston, said in a phone interview that alternatives performed incredibly well in the past fiscal year for endowments.
"Asset allocation continues to be a big driver," said Ms. Myers. "Private equity, venture capital helped. Real estate definitely helped. Some industrial properties did well."
Data from TUCS show that within the realm of equity-like assets (which includes real estate, private equity and hedge funds), small endowments are more likely to concentrate heavily towards U.S. equity, while large endowments are not only more likely to have greater exposure to equity-like assets overall, but also have greater exposure to alternatives in particular.
Equities, alts helped
Mr. Shimberg agreed that "endowments that had healthy exposures to U.S. equities and alternatives fared well," explaining that since global private equity produced returns well into the teens, endowments that had strong exposures to the asset class tended to do well, while those that used hedge fund programs to reduce risk rather than traditional fixed income also saw healthy returns.
"Hedge fund indices provided returns well into the single digits while traditional fixed income produced negative returns," Mr. Shimberg said.
The Wilshire Trust Universe Comparison Service reported that the one-, five- and 10-year average returns for all endowments were 8.6%, 7.6% and 6.4%, respectively. Meanwhile, TUCS reported that the one-, five- and 10-year average returns for endowments with more than $500 million in assets were 10.1%, 8.6% and 6.1%, respectively.
Following Bowdoin College, other schools to see the largest one-year returns were the $25.9 billion Princeton University endowment, at 14.2%; the $16.4 billion Cambridge-based Massachusetts Institute of Technology, 13.5%; $3.8 billion Providence-based Brown University, 13.2%; and the $13.8 billion Philadelphia-based University of Pennsylvania and $8.5 billion Durham, N.C.-based Duke University endowments, both at 12.9%.
The big winners among the schools that disclosed 10-year annualized returns were Bowdoin College at 8.8%; MIT at 8.59%; and the $10.9 billion New York-based Columbia University and Princeton endowments, both at 8%.
Of the endowments that reported long-term returns, the median five- and 10-year returns as of June 30 were 8.87% and 6.42%, respectively.
Harvard University's endowment — the largest in the country at $39.2 billion — returned 10% for the fiscal year, up from 8.1% the previous fiscal year, but still the second lowest of the eight Ivy League schools, only ahead of Columbia's 9% return. It ranked last of the 47 endowments P&I tracked the previous fiscal year.
Nirmal P. "Narv" Narvekar, president and CEO of Harvard Management Co., which oversees the Cambridge, Mass.-based university endowment, wrote in a note sent to Harvard associates that HMC and the university's endowment portfolio are "in the early stages of a multiyear transition, with much work ahead."
Since taking over as CEO in December 2016, Mr. Narvekar has reduced and reorganized HMC's staff to change its investment strategy from a specialized or "silo" approach to a generalist investment model in which all members of the investment team take ownership of the entire portfolio. Several management teams have spun out from Harvard to manage endowment assets externally.
Yale returns 12.3%
Yale University's $29.4 billion endowment, the second-largest university endowment, returned a net 12.3% for the fiscal year. The New Haven, Conn.-based university announced that its endowment returned an annualized net 7.4% and 11.8%, respectively, for the 10 and 20 years ended June 30.
The Ivy League school also announced in October that it is getting into the market for cryptocurrencies and out of the market for assault weapon retailers.
Margaret Chen, managing director and head of Cambridge Associates LLC's OCIO investment management unit, Boston, noted that "a high allocation to equities and low allocations to bonds" is what "drove overall performance" for U.S. endowments. She, too, pointed out that high allocations to private investments and venture capital "would have been very additive to fiscal-year performance."
"The top endowments had over 30% allocations to private investments," she noted.
The second-best place for an endowment to be to perform well, according to Ms. Chen, was strategies that benchmark against the S&P 500 because it "has continued to do very well," she said. The index was up 12.2% in the year ended June 30.
Ms. Chen noted that although private investments have been attractive due to their long investment horizon, those endowments that started investing in private equity early have benefited more and have had greater access to the best managers.
"So, it takes time," she said. "That's why you see this dispersion between top performers and not."
Endowments are also beginning to derisk and become more willing to sit on cash, she noted.
Ms. Chen pointed out four potential challenges that endowments should be on the lookout for in the near future. The first is that the strong equity market of the last 10 years has pushed diversification to the wayside for some institutions.
"When the markets are doing well, investors don't think about risk as much as they should," she said.
The second challenge is that there's an expectation the next 10 years will likely not be as good as the past decade, which means that endowments will have to consider how to accommodate different market conditions when managing budgets for future fiscal years.
The third challenge is geopolitical uncertainty, particularly with regard to trade considerations.
The fourth and final challenge that Ms. Chen foresees for endowments is figuring out how to differentiate their investment strategies. "There's a risk when everyone's invested in the same thing.
"To be a top performer, you have to be different."