Endowments Returns Drop, Outsourcing Steadies

US endowments recorded the lowest returns for the 2015 fiscal year since 2012 and reached a hiatus in outsourcing, according to NACUBO and Commonfund.

The joint study of 812 colleges representing a total of $529 billion in assets revealed endowments returned an average of 2.4% net of fees, a sharp drop from 2014’s 15.5%.

“FY 2015’s lower average one-year return is a great concern,” said John Walda, NACUBO’s president and CEO. “Lower returns may make it even tougher for colleges and universities to adequately fund financial aid, research, and other programs that are very reliant on endowment earnings and are vital to institutions’ missions.”

The dampened gains also contributed to a decline in endowments’ long-term return to 6.3% over a decade, from last year’s 7.1%.

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“The 7% target return could be a tall order over the next few years,” cautioned Catherine Keating, Commonfund’s president and CEO, on the conference call. “The endowment model can evolve and is still the best formula for long-term success… But a 6% or so range of returns—including alpha—is more likely going forward.”

Furthermore, NACUBO and Commonfund found endowments’ asset allocation remained stable despite turbulent market conditions in 2015, with small shifts away from equities to alternatives.

“Institutions are not panicking, not interested in twitchy things, and they have a steady-as-she-goes way of looking at the portfolio,” said Commonfund’s Executive Director Bill Jarvis.

The percentage of “substantially outsourced” endowments also remained the same at 43% over the last year, which may indicate a “pause in this trend.” The vast majority (84%) of respondents reported using a consultant for various services.

Endowments continued to focus on risk management in 2015, with 62% of funds using risk limits in their portfolios, up from 57% in 2014.

More than two-thirds of surveyed asset owners said they use measures such as alpha and beta—an increase from 61% in 2014—while more than half conducted stress testing or scenario analysis.

NACUBO-Commonfund2015

New York City will completely overhaul the investment office responsible for its five pension funds, City Comptroller Scott Stringer announced Tuesday.

The planned changes are the recommendations of a 398-page report reviewing the management and operations of the Bureau of Asset Management, which oversees the investments of the city’s $160 billion pension funds. The assessment, conducted by Funtson Advisory Services, is the first independent analysis of the bureau’s operations since 2002.

“The evaluation is clear: we have to fundamentally rethink how the Bureau of Asset Management does business,” Stringer said. “For too long, too little attention has been paid to our investment operations and there was nothing that could be done to cut through an intractable bureaucracy. Today, that era has come to an end.”

According to Funtson, the bureau’s operations need to be brought “up to the standard of its peer pension systems.” The consultant made a total of 240 recommendations over 20 areas of operation, including investment management, risk and compliance, organization and administration, strategic plan and budget, staff development and training, and records management.

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“To continue to fulfill our fiduciary duties, we must re-engineer every process and procedure and bring our investment operations into the 21st century,” Stringer said. “In the coming months and years, I will be working with the trustees of all five pension systems to address these serious issues.”

The issues cited by the review include the lack of a strategic plan, overreliance on third-party consultants, and under-staffing caused by low compensation and ineffective recruitment. The investment program itself was also found to be too complex: From 2001-2015, while the value of assets managed doubled, the number of external managers increased five-fold.

nyc reform Source: New York City Office of the Comptroller

“Bringing this asset management operation up to leading practice will take all hands on deck over a period of many years,” said Scott Evans, Deputy Comptroller and CIO. “We have already begun to look anew at every process and procedure we have, but this review shows clearly why we need a fundamental re-architecting of the Bureau of Asset Management.”

Stringer and Evans will work with the pension system trustees to develop a roadmap for the bureau’s reorganization, which will be presented at their March investment meeting. Several initiatives already underway include expanding recruitment efforts, establishing internal investment and operational risk committees, and reviewing investment benchmarks.

“Our goal is to make the Bureau of Asset Management the gold standard of performance, risk, compliance, and ethics,” Stringer said. “This comprehensive review provides us a clear picture of what steps we need to take to address our most critical needs.”