The Skorina Report: Fearless Forecast Says That Endowment Returns Will Disappoint in FY2015

The Skorina Report: Fearless Forecast Says That Endowment Returns Will Disappoint in FY2015
SkorinaCan you feel it?  Can you feel the tension building as we await the official endowment returns for fiscal 2015?
Probably not.
But, in any case, we’re here to assuage your anxiety with a fearless forecast, and it’s not going to spread much joy across the campi.
The typical full-year number for big endowments will probably be just 4 to 6 percent.  A few of the high-flyers may do a little better.  Some others will be lucky to see 3 percent.
That means most endowments will fall short of their long-term target rate of return, which is a little north of 7 percent nominal.
That’s a big drop from last year’s average 16.5 percent and even below the recent 10-year average of about 8.2 percent for endowments over $1 billion.
Most schools won’t publish an official annual return number for some weeks, but a few major endowments release quarter-by-quarter reports.  We can use them to project full-year results and get a feel for what happened in the year just past.
We have hard numbers for the first three quarters for four big schools: University of California Regents, University of Washington, University of Florida and Cornell University; all over $1 billion.
With the first three quarters baked in, it was only necessary to project a 4th-quarter value, and we can do that with fair confidence since all the major benchmarks are available for the quarter ending in June.
In the case of University of Florida we don’t even need that crutch, since they’ve already released their full-year results.
Here are the full-year numbers:
Fearless Forecast:
Fiscal Year 2015 Projected Endowment Returns:

Endowment
FY15 Projected  Rtn %
FY14 Rtn %
FY to FY Change Rtn %
AUM on
6-30-14
U of California Regents GEP
Jagdeep Bachher – CIO
5.6
19.0
-13.4
$7.4 bn
 
U of Florida Fdn – UFICO
William Reese – CIO
4.5
13.8
-9.3
$1.5 bn
 
U of Washington
Keith Ferguson – CIO
5.8
15.8
-10.0
$2.8 bn
 
Cornell U
A.J. Edwards – CIO
2.2
15.8
-13.6
$5.9 bn
 
Total:
$17.6 bn
Mean:
4.5
16.1
-11.6
 
Index Returns
FY15
Rtn %
FY14 Rtn %
FY to FY Change Rtn %
 
BNYMellon MT/Endowments
3.7
16.2
-12.5
 
 
 
NCSE >$1 bn
NA
16.5
NA
S&P 500
7.2
Russell 2000
7.0
Russell 3000
7.5
MSCI EAFE
-4.0
MSCI Emerging Mkts
-5.2
MSCI ACWI
0.9
Barclay’s Agg Bond
1.9
BNY Mellon MT >$1 bn
3.6
Cambridge PE Index
>4.9

And here are the quarter-by-quarter results. Q4 numbers are our estimates, except for Florida, which is as reported:
Fearless Forecast:
FY 2015 Endowment Returns by Quarter:

Endowment
FY15
Q1 Rtn %
FY15 Q2 Rtn 
%
FY15
Q3 Rtn %
FY15 Q4 Projected
Rtn %
FY15
 Projected
Rtn %
U of California Regents GEP
0.2
2.1
2.7
0.6
5.6
U of Florida Fdn/UFICO
1.2
0.8
2.0
0.5
4.5
U of Washington
0.5
1.1
3.6
0.6
5.8
Cornell U
-0.8
0.1
2.3
0.6
2.2
Mean:
0.3
1.0
2.7
0.6
4.5
 
Index Returns
 FY15
Q1 Rtn %
FY15 Q2 Rtn 
%
FY15
 Q3 Rtn %
 FY15 Q4 
Rtn %
 FY15 
Rtn %
 
BNYMellon MT – Endowments
-0.5
1.0
2.2
0.6
3.7
S&P 500
1.1
4.9
1.0
0.3
7.2
Russell 2000
-7.4
9.7
4.3
0.4
14.3
Russell 3000
0.0
5.2
1.8
0.4
14.5
MSCI EAFE
-5.9
-3.6
4.9
0.6
3.5
MSCI Emerging Mkts
-3.5
-4.4
2.2
0.5
-9.2
MSCI ACWI
-2.2
0.5
2.4
0.2
-4.3
Barclay’s Agg Bond
0.2
1.8
1.6
-1.7
2.8
BNYMellonMT >$1bn
-0.6
1.7
2.5
0.0
5.5
Cambridge PE Index
1.4
0.8
2.6
NA
>4.9

We considered doing an elaborate custom estimate of Q4 results for each school based on their known asset allocations, but concluded that it would be overkill and wouldn’t add much value.
 
BNY Mellon publishes a quarterly number for endowments as a subset of their Master Trust Universe statistics (based on about 100 funds) and it’s good enough for our purposes.  It’s 0.6 percent for Q4 and, as we see above, the BNYM number tracks pretty closely to the quarter-by-quarter average for our four schools.
It was also very near the NACUBO-Commonfund NCSE number for big endowments in FY 2014.  So we’ve used that as our Q4 return estimate for these funds (except for Florida, which is already known to be 0.5 percent for the quarter).
A look at the public market benchmarks for Q4 shows equity returns were barely positive and the Barclay’s Agg Bond number was negative 1.4 percent for the quarter.  Technically, it was the tenth consecutive quarter of a rising S&P 500, but the bull was starting to look and sound pretty winded.
On a full-year basis domestic stocks did quite well: up 7.5 percent on the broad Russell 3000 and 7.2 percent on the large-cap S&P 500.  But big endowments are highly diversified into ex-U.S. and emerging-market stocks these days, and those were all in negative territory.
Globally, as measured by the MSCI All Country World Index, stocks returned less than 1 percent for the fiscal year and core U.S. bonds less than 2 percent.
Alts to the rescue:
Those paltry FY15 numbers would probably have been even worse without a lot of help from the alternative portfolios, especially private equity and real estate.
Big endowments allocate about 15 percent to PE on average, and the general partners have been winding up deals and distributing profits to their LPs pretty generously in recent quarters, providing good returns.
If the Cambridge PE index has even a small positive return in Q4 then it will total at least 5 percent for the year; and we suspect that will be on the low side for most big institutions with seasoned PE portfolios.
Florida, for instance, with a PE allocation of about 13.8 percent, reported an excellent 17.4 percent PE return for the full fiscal year, which helped offset tepid stock and bond returns.
CalPERS, a big non-endowment PE investor, reported preliminary full-year returns of 8.9 percent on private equity.  (That was short of their benchmark, but still helped keep their overall annual return of 2.2 percent from looking even worse).
Big endowments also allocate about 14 percent to real assets, including real estate, and RE did very well, returning 13 percent for the full year per a standard index.
Florida did even better than that with a 14.4 percent return to real estate for the year.
Hedge funds, on the other hand, didn’t help much, with the HFRI Weighted Composite index returning just 2.3 percent.
Looking again at Florida (the only actual full-year results we have) their HF portfolio returned 4.2 percent; that’s better than the HFRI but well short of their own benchmark.
We should note that both Florida and California have been breaking in new chief investment officers.  UC Regents recruited Jagdeep Bachher from Alberta’s big AIMCO fund early last year (succeeding Marie Berggren, who retired after a long, successful run).
In November UFICO recruited William Reese from St. Jude’s Children’s Hospital in Memphis.  Neither has had much time yet to tinker with their new funds.
Keith Ferguson, the 10-year veteran CIO at University of Washington led our Gang of Four with a (projected) 5.8 percent return, so good for him.
A.J. Edwards at Cornell unfortunately didn’t fare quite as well as the public schools in this group.  But we thank all of them for helpfully publishing their quarterly numbers.  (We selfishly wish others would do likewise.)
Fiscal 15, and its last quarter in particular, was mostly disappointing for endowment investors.  Stocks rose through the late spring, but gave back most of their gains in the last few trading sessions as we felt the first rumblings of trouble from China.
Now, as we stare into the abyss of Q1 FY16, those modestly positive returns of last year are already looking better and better.

Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.

Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago.  After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.

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