Updated with correction
What a difference a year makes. This time last year, endowment investment offices were trying to recover from a bad final quarter. Things are much brighter now, but endowments are taking the opportunity to get ready for the next financial downturn, while their institutions prepare for enrollment challenges that will impact spending and investment decisions in 2020 and beyond.
Like other institutional investors, endowments and foundations in 2018 faced one of their worst years since the financial crisis thanks to volatile equity markets. According to the Wilshire Trust Universe Comparison Service, they lost 7.52% in the fourth quarter of 2018, while data from the Northern Trust universe found median losses of 6.3% for the quarter and 2.6% for the year ended Dec. 31.
By June 30 of this year, the median endowment fiscal year return was positive again, at 4.9%, according to Cambridge Associates LLC. Even the largest endowments — like Harvard University, at $40.9 billion, Yale University at $30.3 billion and Stanford University at $29.6 billion — recorded relatively modest returns of 6.5%, 5.7% and 6.5%, respectively.
Yet there were a few notable standouts. The $1.7 billion endowment of Bowdoin College in Brunswick, Maine, continued to outshine most of its peers, returning 10.9% in fiscal 2019. Brown University in Providence, R.I., had its best year yet, growing to a record $4.2 billion by the end of its fiscal year in June, with a 12.4% return that surpassed both its 5.8% benchmark and the 4.9% median.
Jane Dietze, Brown University vice president and chief investment officer, credited strong partnerships with investment managers and an emphasis on downside risk management, "which proved to be valuable in a volatile year for U.S. stock markets," she said, as the endowment outperformed the S&P 500 index primarily as the market declined.
One standout asset class was absolute return, which makes up 37% of Brown's portfolio. Those managers "exceeded even elevated expectations," Brown's 2019 endowment report says, beating the S&P 500 despite a net exposure of less than 50% to the market index.