Preliminary Data: Endowments Losing Money on Portfolios

Educational endowments earned an average investment return in the negative numbers (-0.3) in fiscal year 2012, the twelve months beginning July 1, 2011. This is according to the National Association of College and University Business Officers, which compiles such data annually in collaboration with the education and research arm of Commonfund.

This is only preliminary data from the NACUBO-Commonfund Study, but if it holds up it obviously indicates a sharp drop from the FY2010 return of 11.9, [that’s +11.9] or the FY2011 return of 19.2. Full results, which will come from a database of more than 800 institutions of higher learning, will be available in late January 2013.

Broken down into size cohorts, the results on the investment portfolios of endowments over this FY range across the zero mark. The two largest cohorts, and the smallest cohort, all posted positive results for the year. It was the three mid-range cohorts that got the negative results, and negative enough to ensure a negative average for the whole.

In a statement, NACUBO president John D. Walda and Commonfund executive director John S. Griswold said, “The data for FY2012 as well as for all longer periods confirm the historic pattern of outperformance by larger institutions, chief those with assets in excess of $1 billion.”

Cohorts and the Spread

Specifically, the cohorts are defined as follows:

  • Assets in excess of $1 billion (preliminary return of 1.2 percent);
  • Assets from $500,000 to $1 billion (return 0.1 percent);
  • Assets from $100 to $500 million (return -0.5);
  • Assets from $50 million to $100 million (return -1.0);
  • Assets from $25 million to $50 million (return -0.8);
  • Assets below $25 million (return 0.2).

Considering each institution reporting (thus far) as a separate data point, the spread of results is much broader. The best performing reporting endowment earned 15.8 percent in the FY and the lowest -9.5 percent.

The size of the spread among the six cohorts varies from year to year. In recent years, the general trend has been toward a narrowing of that spread. On the above data, the current spread between best and worst performing size cohort is 220 basis points. In last year’s preliminary report the spread was somewhat narrower: 180 basis points.

Asset Allocations

The way in which an institution will allocate its assets varies with size, with the larger size cohort much less reliant on domestic equities than the smallest (the averages there are 10 percent allocation to 37 percent, respectively). On the other hand, the smallest sized endowments hold a good deal more cash or short-term securities than the largest (9 percent to 3 percent of their portfolios, respectively).

Allocations to alternative investments [defined to include hedge funds, private equity, global venture capital, and private equity real estate investments] have been on the rise for a decade now, especially among the larger cohorts. The preliminary data for 2012 indicates that this trend continues.  Even the smallest of the institutions now allocate 14percent of their assets to alternatives. The largest allocate a staggering 59 percent there.

Fortunately for the sanity of endowment officials in a year of such lousy portfolio results, there are grateful and generous alumni.  Two hundred and fifteen organizations have thus far reported on their receipt of gifts in FY2012, and the average total was $5.8 million, while the median was $2 million. Here too, size matters. Gifts, measured by either average or median, correlated with the size of the institutions.

The NACUBO-Commonfund is the most comprehensive annual report on the endowment performance of higher education institutions in the United States in existence. In its final form, it will include not only updated numbers but a discussion of endowment governance practices and policies.

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