As university endowments release record-breaking fiscal year returns, Chestnut Advisory Group’s Amanda Tepper raises a returning and confounding issue: while performance certainly matters, the one-year numbers aren’t the bellwether the industry treats them as. 

“Certainly, absolute return is not the primary goal,” Tepper said. “It’s a holistic goal. And every year there’s a number that’s going to be your performance. But it’s just an output at any given time.”

Tepper added that while “human beings love rankings … no one’s hiring an OCIO to manage a multi-generational pool of money aiming to be Number One next June. It’s an outcome; they have investment policy statements, they have philosophies.”

As the larger, more diversified endowments post double-digit annual returns, other advisors and OCIOs stress that while endowments can boast top quartile annual returns, they can’t do much else with them. 

Morgan Stanley Wealth Management’s head of OCIO Sona Menon explained over email there are other factors to evaluate success; some endowments are pivotal in supporting the university’s spend, for example. 

Plus, “high double-digit absolute returns are difficult to replicate every year,” Menon said, adding that viewing performance through a three-to-five-year timeline can be more valuable.

Many large endowments were also boosted by early investments in SpaceX. The performance gap among the elite and university endowments narrows considerably over the 10-year timeline.

Over video, Bank of America's William Jarvis told Institutional Investor that while one-year returns are a component of the process they’re “not the end of the process.” 

“A one-year return makes a nice headline but you’re really talking about sustaining that purchasing power over time,” said Jarvis, who oversees thought leadership for institutional and private nonprofits in the banking giant’s endowment and foundation group. 

The former Commonfund Institute executive director explained that when a donor gives $10,000 (for example), they don’t want that number preserved; they want that donation to maintain its purchasing power. “It has to keep up with the pace of inflation,” Jarvis said. “The donor didn’t intend for you to freeze that money.”

With most endowments spending 4.5 percent of their portfolios every year, and private foundations, 5 percent, Jarvis notes “you’re really looking for10, 15, 20, or 25 years to determine how successful they’ve been.” Bank of America’s 15-year future inflation estimate is currently at about 2.3 percent. 

“The complexity of these portfolios and what it entails to do this the right way is a lot more complex,” added Bernard Reidy, who oversees the national endowment and foundations OCIO clients for Bank of America Private Bank, noting these organizations are limited in their resources in targeting and managing growth assets. 

Reidy explained that given the turnover of committee members and length of terms on those seats compromises things as well, but “at the end of the day, every organization thinks about budgets — fiscal budgets, risk budgets — but most don’t think in terms of governance.”

Chestnut Advisory sees OCIO services in three buckets: Investments (“Of which performance is one of 8 or 12 factors,” Tepper said), Operations (which is huge and could include customer reporting, sub-accounting), and value-added services (ESG, education, fundraising support.

Liquidity management is also huge. “You can have great performance, but if you’re overallocated to privates it may not matter if you have to sell off assets to fulfill your commitment to student aid.”