US Endowments Beaten by Public Pensions in FY2013

Higher education funds returned 11.7% on average, whereas US public pensions gained 12.4%, according to NACUBO-Commonfund and Wilshire data.

(January 28, 2014) — US university endowments performed well in the fiscal year ending June 30, 2013, recording an average net return of 11.7% and bouncing back from a 0.3% decline last year, NACUBO and Commonfund have reported.

Still, endowments lagged behind US public pension funds, which posted a median gain of 12.4% for the same period, according to Wilshire Associates data released last August.

The endowment study, published January 28, included 835 institutions representing $448.6 billion. 

It found that domestic equities produced the highest average return of any asset class in endowments’ portfolios at 20.6%. International equities followed at 14.6% and alternatives generated an average return of 8.3% for education endowments. Fixed income and short-term securities/cash lagged behind, with gains of 1.7% and 1.2% respectively.

“The strong overall performance by endowments is encouraging at a time when the global economy continues its relatively slow recovery from the economic crisis of five years ago,” said Commonfund Institute Executive Director John Griswold. “This year’s investment results reflect in large measure the strength in publicly traded equities that has prevailed since early 2009.”

According to the report, the endowments averaged a net five-year return of 4% and net 10-year return of 7.1%. Institutions with larger endowments outperformed smaller funds. Over the last 10 years, those in 75th percentile by assets gained 7.8% annually, compared to the 25th percentile’s 6.3%.

“While larger endowments have performed better over the long-term 10-year period, smaller endowments with higher allocations to domestic equities have done well in the shorter term—a result that has enabled them to continue to support their educational missions,” Griswold said.

Of various alternative vehicles, distressed debt generated the highest average return at 14.8%, followed by marketable alternatives at 10.5%. Private equity returned 9.1%, the study found. 

“This relative pause in the decade-long growth of alternative strategy allocations will bear watching in future years,” he said.

Asset allocations remained steady in fiscal year 2013, with little change from 2012. Participating endowments allocated 16% to domestic equities, 10% to fixed income, 18% to international equities, 53% to alternatives, and 3% to short-term securities and cash.

While NACUBO and Commonfund’s preliminary data reported a seven percentage point drop in allocations to alternatives during the 2013 fiscal year—from 54% to 47% of portfolios. The final report, however, only indicated a 1% fall. Significant increases in private equity allocations by several large institutions accounted for the difference, according to Griswold. 

Harvard University was ranked at the top of the list again this year for total assets under management, adding $2 billion to its $30 billion endowment. Yale University was the second richest school, according to the report, with $20 billion in assets in 2013, up from $19.3 billion last year.

However, expanded portfolios and good investment performance was not enough to put universities at ease, according to the report. 

“Despite the improvements in investment returns over the past year, colleges and universities are in a period of rethinking their budget-setting strategies and priorities,” John Walda, NACUBO president and CEO, said. “We have gone through a great period of volatility in the financial markets over the past 10 years, along with deep cutbacks in government funding for higher education and declines in enrollment and tuition revenue at some schools.”

Average total debt increased in fiscal year 2013 to $204.3 million from $187.5 million last year, while average spending rate gained 0.2% from last year, reaching 4.4%.

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By Sage Um