Endowments Rebounding

Appearing to bounce back from their worst year since the Great Depression, university endowment investment returns averaged 12.6 percent for the 2010 fiscal year, according to preliminary data released today.

The findings by the National Association of College and University Business Officers and the Commonfund Institute suggest the positive returns reported anecdotally by individual colleges in recent months are shared across the higher education sector. At the same time, however, the data show the returns of the least wealthy institutions have -- in a second straight anomalous year -- outpaced those of the richest universities.

Colleges suffered dramatic losses of 18.7 percent on average for the 2009 fiscal year, so the recovery is still likely to be a long slog.

“When your endowment drops a quarter in value in the course of a matter of months, gaining back 12 percent is a partial victory, but there is still a lot more work to be done,” said Matthew Hamill, NACUBO’s senior vice president.

The full NACUBO-Commonfund Study of Endowments, which includes the performance of individual colleges, won’t be released until January. When released last year, the full survey included responses from more than 840 institutions, compared with the 80 colleges used to provide the preliminary snapshot released today.

Despite the smaller sample, there are enough respondents already to provide a glimpse into how colleges of varied endowment sizes are performing, the analysts say. As with last year, colleges with endowments valued at less than $25 million had the best returns -- topping the average by 1.5 percentage points, with returns of 14.1 percent.

Returns By Endowment Value, 2010

Source: NACUBO-Commonfund Institute Study of Endowments (Preliminary Data)

Colleges with smaller endowments are often more heavily invested in lower-risk, lower-return asset classes like fixed income, a category that includes government bonds. Relegated to playing it more safely, these colleges missed out on some of the huge returns the wealthiest colleges saw in the years before the recession. Even so, many of the smaller endowment colleges have also been more insulated from losses in areas like private equity, a complex investment category that would include start-up companies and assets not publicly traded on the stock exchange.

“A more traditional asset allocation, which institutions with smaller endowments are more likely to have, we think will outperform some of the most diversified endowments [this year],” Hamill said. “It’s kind of turning the thinking about asset allocation inside out a little bit, but most observers believe that’s a temporal phenomenon.”

Indeed, analysts seem at pains to stress that the diversified portfolio model most investors have embraced for decades is still the most viable in the long run. While colleges should learn from this crisis that they may need more liquidity, or cash on hand, it would be a mistake to think the economic turmoil of the last two years means a healthy mix of different assets isn’t still important, said William Jarvis, managing director of Commonfund Institute.

“There has been a tendency to mix up the Madoff scandal and the liquidity crisis with the question of whether it’s a virtue to diversify,” he said. “Of course it’s a virtue to diversify.”

While the full survey of endowment returns released in January will show the asset allocations of different types of institutions based on endowment values, the preliminary report doesn't provide that information. The sample wasn’t large enough to show a consistent trend at this point, Jarvis said.

NACUBO and Commonfund did not identify the 80 participating colleges from which the data were culled, but noted that the highest return among the group was 36.2 percent. The lowest return was 4.8 percent.

The data also show that spending rates for endowments haven’t shifted dramatically. The average spending rate was 4.3 percent, down just slightly from the 4.4 percent rate of 2009.

All of the data provided for the survey are "net of external fees," meaning colleges subtracted related expenses such as auditing.