2010 Study of US Endowments Shows Average 11.9% Investment Return

(January 27, 2011) — The 2010 study by the National Association of College and University Business Officers (NACUBO) and the Commonfund has shown that endowments in the US returned an average of 11.9% for the 2010 fiscal year, a sharp improvement compared to the negative 18.7% average return reported in the previous year’s study.

“The study reflects the heightened importance that institutions are paying to liquidity, cash reserves, and investment policies,” William E. Jarvis, managing director of the Commonfund Institute, told aiCIO. “The changes you’re seeing with endowments reflects the fact that the endowment model is alive and well, despite commentators over the last few years who have questioned the model,” he said, noting that while endowments are still below their pre-crisis peaks in terms of size, highly diversified portfolios have enabled endowments around the country to weather the financial storm.

The highlight of the NACUBO-Commonfund Study, Jarvis believes, is the importance of investment policies to counter the temptation of external pressures in addition to the human psychology of investing. “The downturn was no blessing in disguise. It was a catastrophe,” he said, adding that with that catastrophe came the lesson that institutions should stick to highly diversified strategies over the long-term. “You need investment policies written down to be a guide to get you through stressful times.”

Further highlights of the study: The average annual three-year return for all institutions was -4.2%, with the corresponding five-year return figure at 3.0%. For 10 years the average annual return was 3.4%, NACUBO and the Commonfund revealed at a press briefing yesterday morning. Meanwhile, the study showed positive returns in 2010 for all major asset classes, excluding real estate. The highest return this year came from domestic equities, which gained 15.6%, followed by fixed income (12.2%); international equities (11.6%); alternative strategies (7.5%); and short-term securities/cash/other (2.7%).

The NACUBO-Commonfund Study of Endowments is a combination of the traditional NACUBO Endowment Study and the Commonfund Benchmarks Study of Educational Endowments, which first partnered in 2008 to conduct a survey of roughly 1,000 institutions around the country. Incorporating both qualitative and quantitative elements, the research is focused on investment performance, asset allocation, market values, portfolio rebalancing, debt load and institutional response to the current investment environment. The study has had a rising number of new respondents with very few dropouts, according to NACUBO spokesperson Lisa Jordan.

The second annual NACUBO-Commonfund Study of Endowments (NCSE) includes institutions representing over $346 billion in combined endowment assets. The final report will be available for purchase in February 2011.

Separately, in the UK, universities are mirroring the US endowment approach, aiming to diversify their assets while shifting away from the usual equity/bond/real estate mix. The 31.6 billion UK universities pension fund is putting more money into emerging markets and hedge funds, Universities Superannuation Scheme (USS) CIO Roger Gray recently told Reuters. Exposure to emerging markets will rise to 7.5% from 6.5% and is likely to rise further still, he told the news service.