University Endowments and Investment Returns

Each year Pensions & Investments (P&I) does a story on the performance of endowments of American colleges and universities. This year, as of June 30, returns of more than 80 percent of the 31 funds they track ended up in the red. Just six were in positive territory.

The winner for one-year returns for fiscal 2016 was Yale University, earning 3.4 percent on its $25.4 billion endowment. The $3.6 billion 20161121-university-endowmentOhio State University endowment and the $9.1 billion endowment of University of California tied for last place, posting a -3.4 percent return. The average 12-month return for the large U.S. endowments in P&I’s universe as of June 30 of this year was -1 percent, compared with the 6.2 percent average for last year.

Importantly, netting out fees of the 445 endowments and foundations tracked by consultant Cambridge Associates, Inc., resulted in a much sharper decline of 2.63 percent for the year ended June 30.

In Most Endowment Funds Feel Dreaded Pinch of Negative Returns Christine Williamson shares comments from endowment managers that underscore the importance of taking a long-term view of investing. “One of the advantages of managing an endowment is a pure investor mindset. We do things very long term and don’t worry too much about a single bad year,” said Scott Malpass, CIO of the $10.4 billion endowment of University of Notre Dame. According to Williamson, the endowment was down 0.3% for the year. However, the university’s annualized return was 8 percent for the 10 years and 11.3 percent for the 20-year period.

Like Notre Dame, all other endowments in P&I’s universe providing data had positive returns for longer periods, with a 6.5 percent average for 10 years and 9.7 percent over 20 years.

There’s no question that in our current environment of slow growth and historically low interest rates, endowment CIOs and investment committees may have difficulty meeting their assumed rate of return. P&I’s review of university financial reports found that the objectives for most institutions is a real return of 5 percent over inflation as measured by the Higher Education Price Index (HEPI) or the Consumer Price index. Over the 12 months ended June 30, the HEPI inflation-adjusted benchmark return was 8.1 percent, while the CPI was 6.1 percent. None of the endowments on P&I’s list matched the one-year return.

For 10 years, Williamson reports the benchmark return calculated using CPI was 6.8 percent, which was matched or exceeded by 11 endowments in the P&I ranking. No endowments matched or topped the 10.1 percent benchmark HEPI return. Of course, endowments were more successful in the 20-year period. All but one of the 13 endowments topped the 7.3 percent CPI benchmark return, and six funds matched or exceeded the 10.7 percent HEPI benchmark.

What’s a college to do when an endowment can’t meet their expected rate of return?

As noted in the article, there are “four levers” an endowment can use in low-return markets: reduce spending; increase donations; take more portfolio risk in search of higher returns; and erode the corpus of the endowment.

For individual investors, this advice translates into being mindful of spending, saving aggressively for goals, avoiding products with high fees, and remaining committed over the long-term to a properly diversified investment portfolio.

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