Not Out of the Woods Yet

While 2011 endowment returns make it look like investing is back to the good old days, colleges and universities aren't in the clear yet.

College and university endowments returned an average of 19.2 percent in the fiscal year that ended June 30, 2011, a rate that more closely resembles pre-recession levels than those of the preceding two years, according to an annual survey compiled by the National Association of College and University Business Officers and Commonfund, an investment firm for nonprofit organizations.

And unlike the recession years, when smaller endowments had higher rates of return than wealthier institutions, the spread was closer to that of the mid-2000s. Institutions with large endowments, which often tend to have more money invested in "alternative strategies" such as hedge funds, venture capital, private equity, and private real estate, saw the highest returns, while smaller endowments, with more money tied up in domestic equities and fixed-income investments, had lower returns.

While the returns look good for higher education, analysts said now is not the time to celebrate. After taking a huge hit in the 2009 fiscal year, almost half of all university endowments are still worth less than they were in 2008. And the second half of 2011 -- which is not covered in the survey -- was a volatile period for financial markets, and several analysts suspect that, barring a large surge this spring, returns for the 2012 fiscal year will be less than those from 2011.

Even with sizable returns for the 2010 and 2011 fiscal years, those gains have been tempered by payouts and inflation, putting many institutions behind where they had hoped to be. "Even though this was a really great year, many of our institutions are still not at the point where they’ve recovered the value they lost from the recession," John Walda, president and chief executive of NACUBO, said at a press event in New York on Monday morning.

A total of 823 endowments totaling $408.1 billion responded to the survey, which is conducted annually. That is a slight drop from last year, when about 850 institutions participated. Survey directors attributed the decrease to staffing cuts at many institutions, which might have left finance offices with too few employees to fill out the survey.

In last year's survey, endowments of all sizes generally performed the same. The largest endowments -- those of more than $1 billion -- averaged a return of 12.2 percent, while the least wealthy -- those of less than $25 million -- returned 11.6 percent. The spread was wider this year, with the wealthiest institutions averaging returns of 20.1 percent and the least wealthy returning an average of 17.6 percent.

The gains for large endowments are associated with their investments in alternative strategies, investment types that small endowments tend not to have access to, such as hedge funds and private equity. Wealthy institutions placed 60 percent of their money in these alternative strategies, compared to just 10 percent for less-wealthy institutions. In addition to having more access to riskier investments because of their size, wealthier institutions also are more likely to employ full-time endowment managers.

Alternative investments tend to perform very well in good years but take bigger losses in bad years, which accounted for the largest losses in 2009. Many in higher education expected the 2008 credit crisis and ensuing recession to diminish institutions' appetites for the risky investments that drove their losses, but that hasn't been the case. For institutions of all sizes, the proportion of money placed in these alternative investments increased from 46 percent in 2008 to 53 percent in 2011.

The survey's directors noted a slight increase in the amount of cash institutions were keeping -- about 4 percent of the overall allocation. Since cash doesn't generate significant returns, institutions are likely keeping it to ensure they have enough liquidity in the wake of the credit crisis. Since 2009, investment agencies have emphasized the need to have liquid assets to cover debts in case access to credit is restricted, as it was in 2008.

While this year's returns were strong, they are tempered by the long-term swings. The 10-year average of 5.6 is about twice the rate of increase of the S&P 500, but that includes an 18 percent decrease in 2009 and a 19 percent increase in 2011.

"One of the things highlighted by today’s numbers is that they show the continuing volatility in the markets, which makes it a challenge for those who are managing endowments to support institutions on a steady basis," Walda said.

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