Performance Down, Spending Up at Educational Endowments

The annual NACUBO-Commonfund Study of Endowments highlights continued disappointing performance across the U.S.


Boston, Massachusetts - September 5, 2016: Memorial Church at Harvard University campus in Cambridge Massachusetts

It’s official: Performance among college and university endowments was lousy for the past fiscal year, at a time when spending was on the rise, a new study of educational endowment returns confirms.

For the fiscal year ending June 30, 2016, the 805 colleges and universities participating in the annual NACUBO-Commonfund Study of Endowments returned an average of -1.9 percent, net of fees. That result, when combined with last year’s weak 2.4 percent gain, pushed the 10-year average performance down to 5.0 percent, from last year’s 6.3 percent, according to the study, released on Tuesday.

The performance falls well short of the median 7.4 percent return that institutions say they need to maintain their endowments’ purchasing power after factoring in spending, inflation, and investment management costs. What’s more, the declines come at a time when three quarters of the survey respondents report having spent more money from their endowments than in the previous fiscal year to support the missions of their institutions. Those institutions spent a median 8.1 percent more than in the previous year, well above the inflation rate, according to the study.

The news hasn’t been all bad for endowments over the past few years, however. For example, educational endowments in the 2014 study produced an average 15.5 percent return, which followed 2013’s positive 11.7 percent average return. But those two good years were not sufficient to stop the downward path of long-term performance, which was also badly hurt by the 18.7 percent loss posted during the global financial crisis of 2008-2009.

Fixed income proved to be the best-performing traditional strategy over the past fiscal year, with an average return of 3.6 percent. U.S. equities lost 0.2 percent, non-U.S. equities lost 7.8 percent, and alternative strategies lost an average 1.4 percent over the period. Drilling down among alternatives, however, the star proved to be private equity real estate, with a 7.1 percent gain for the fiscal year, followed by private equity at 4.5 percent and venture capital at 1.5 percent. Marketable alternative strategies — a group that includes hedge funds, absolute return strategies, market neutral, and so-called 130/30 funds, among others — lost 4 percent, while commodities and managed futures lost 7.7 percent. That was actually a big improvement over the previous period’s 17.7 percent loss.

The top-decile performers among the endowments surveyed managed to claw their way to positive territory, producing an average 2.7 percent return, net of fees. The top 25 percent produced an average net return of 1.0 percent.

Poor performance was agnostic across large and small funds, despite substantial disparities in their asset allocation. For example, endowments with over $1 billion in assets hold only 13 percent of their assets in U.S. equity but have 58 percent in alternative strategies that include hedge funds, private equity, venture capital, energy and natural resources. Smaller funds, with between $51 million to $100 million in assets, have 33 percent invested in domestic equity and only 24 percent in alternative investments. Despite those differences, the largest funds produced a -1.9 percent return, while the smaller endowments barely did better at -1.8 percent.

The schools participating in the study had a collective $515.1 billion in assets, with an average endowment size of $639.9 million.