Education Endowments Report 19.8 Percent Return in 2011

Colleges and university endowments enjoyed an average 19.8 percent net return for the 2011 fiscal year ended June 30, 2011.

This performance easily enabled them to meet their spending needs. On average, the group spent 4.3 percent of assets, and the two largest endowments shelled out about 5 percent each.

These are among the preliminary findings of data gathered from 284 U.S. endowments by the Commonfund Institute and the National Association of College and University Business Officers. The full report is scheduled to be released in February 2012.

The 2011 performance comes on the heels of the previous year’s 11.9 percent return, net of fees, after losing 18.7 percent, on average, for the fiscal year ended June 30, 2009.

Are these endowments finally out of the woods? Not so fast.

Endowments are still at only an average of 86 percent of their value in fiscal year 2007. And despite the strong performance for fiscal 2011, the returns for five- and ten-year periods are only 5 percent and 5.5 percent, respectively, according to the study.

These endowments typically like to spend about 5 percent of their assets each year. In 2010 — the last year for which a breakdown is available — expenditures were up 5.6 to 5.7 percent for endowments with more than $500 million, the highest percentage since at least 2001.

Keep in mind, however, that administrative costs eat up an additional 1 percent or so of assets and inflation takes a further 2 percent.

So endowments really need to earn at least 8 percent per year just to keep up with their costs and spending on financial aid and scholarships, which are facing increasing numbers of requests in this struggling economy. “This has implications for the risk profile of portfolios,” says William Jarvis, managing director of the Commonfund Institute.

Interestingly, this year’s study found only a slight difference in performance between smaller and larger endowments. Institutions with assets of more than $1 billion enjoyed a 20.2 percent return, on average, while those with assets of less than $25 million reported an average return of 19.1 percent. Those with between $101 million and $500 million in assets reported an average return of 19.9 percent.

Perhaps the most noteworthy part of the report details how the asset allocation broke down by asset size. Not surprisingly, the smaller the fund, the bigger the risk it took. For example, institutions with more than $1 billion in assets allocated just 12 percent to domestic equities, but endowments with less than $25 million in assets reported a 41 percent allocation.

The study, divided into five asset groups, showed the two largest asset groups devoted 10 percent or less to fixed income, while the three smaller groups had average fixed-income allocations that exceeded 20 percent.

The largest endowments were most likely to allocate the largest sums to alternative strategies. For example, in fiscal 2011 institutions with more than $1 billion in assets reported an average allocation of 58 percent to alternatives, while institutions with less than $25 million in assets reported an average allocation of just 9 percent.

This was down from 2010, when institutions with more than $1 billion in assets reported an average allocation of 60 percent to alternatives, while the smallest endowments shelled out 12 percent of assets to alternatives.

Although a breakdown of performance among the different asset classes is not yet available for fiscal 2011, in the preceding year alternatives gained, on average, 7.5 percent, lagging the average 11.9 percent return of endowment portfolios as well as all other major asset classes.

However, this is not necessarily a bad sign. In the 2008–’09 period, when the global markets collapsed, alternatives lost just 12 percent, or less than half of the 25 percent decline in U.S. equities. “Alternatives provide diversification,” Commonfund’s Jarvis stresses. “Hedged strategies are not expected to outperform in rising markets.”

So with endowments still about 14 percent below their value in 2007 and expenditures and other costs exceeding long-term performance, what are universities and colleges going to do? Pass the hat more aggressively. Says Jarvis, “We will see more of a focus on fundraising and development.”

Good news for the beleaguered U.S. Postal Service.