Of 809 institutions studied, endowments showed much higher rates of return for the 2017 fiscal year, averaging 12.2%, up from -1.9% in fiscal 2016, and 2.4% from fiscal 2015, according to the 2017 NACUBO-Commonfund Study of Endowments.
“This obviously reflects continued strength in public equity markets. US equity markets have been positive for each of the last nine calendar years, and this year, we saw really complementary strength in global markets as well, [especially] EMEA and emerging markets,” said Catherine Keating, president and CEO, Commonfund.
Five primary investment categories were tracked in the study, with only fixed income, at 2.4%, showing a lower return in FY2017 than FY2016’s 3.6%. Non-US equities, which produced last year’s lowest return in the post-Brexit environment at -7.8%, generated this year’s highest return, at 20.2%, followed by US equities, which returned 17.6% compared to last year’s -0.2%. Alternative strategies turned in a 7.8 % return versus -1.4 % in FY2016, while short-term securities/cash/other returned 1.4 % compared with last year’s 0.2 %.
Of alternative investment strategies, private equity, defined as LBOs, mezzanine, M&A funds and non-US private equity, provided the highest return, at 11.7%, followed by distressed debt and venture capital, which generated returns of 8.9%. and 8.4%, respectively.
But endowments’ 10-year average annual returns dipped to 4.6% from 5% in 2016, far below the common endowment target rate of 7% to 8%. One factor causing the dip: the 10-year average no longer includes the 17.2% return rate from 2007.
The lower rate “reflects the continued impact of the financial crisis in 2008 and 2009 on endowment returns,” said Keating, “and it also reflects, interestingly enough, a fair amount of volatility in the last decade. The decade had five years of double-digit returns, and four years where returns were either negative or flat.
But if the 2008/2009 post-crash rates weren’t factored in, five of those eight years had positive double-digit returns, “so, there’s no doubt that the recovery from the financial crisis has been strong and positive,” said Keith Luke,
The study included 809 institutions representing $566.8 billion in endowment assets. The average US endowment was $700.7 million, and the median endowment was approximately $127.8 million. 44% of study participants had endowments that were $100 million or less.