US College Endowments Gained 7.7% in Fiscal 2023, but Suffered From Weak Alternatives Returns

University endowments returned an average 7.7% in the one-year period ending June 30, 2023, according to the National Association of College and University Business Officers’ annual study of endowments, made in partnership with asset management firm Commonfund. The 2023 report, a version of which NACUBO has released since 1974, tracked 688 university endowments representing $839.1 billion in assets.

Fiscal year 2023’s return of 7.7% was a strong rebound from 2022’s average return of negative 8%, as tracked by that year’s NACUBO study. These figures pale compared to the impressive 30.6% endowments returned in fiscal 2021.

The median endowment of those in the NACUBO study was $209.1 million, while more than one-third had less than $100 million in assets. University endowments also increased their spending during fiscal 2023, withdrawing $28.4 billion during the period, an increase of 8.4% from fiscal 2022.

Still, both NACUBO and other sources found significant discrepancies between endowments when it comes to their asset allocation and size. Alongside NACUBO, Markov Processes International also released its FY 2023 Ivy League Endowment report card, following the performance of endowments that follow the so-called “Yale Model,” pioneered by late Yale CIO David Swensen.

Weak Alts, Strong Equities

Larger endowments historically tended to outperform smaller ones, but interestingly, the reverse was true in 2023, NACUBO noted. Alternative investment returns were weak across the board in 2023, and larger endowments tend to hold more of these types of investments. Smaller endowments hold more equities in their portfolios.

According to NACUBO, endowments with assets greater than $5 billion returned an average of 2.8% during the fiscal year, while endowments with less than $50 million in assets returned an average of 9.8%. The NACUBO study split respondents into seven cohorts, depending on the size of their endowments. The bottom three size cohorts all returned greater than 8%.

As MPI noted, Ivy League and other elite institutions that have been champions of high allocations to alternatives did not perform as well as their equity-heavy peers. MPI’s Ivy tracker, which follows the eight Ivy League institutions as well as Stanford University and MIT, found that these universities returned an average of 2.1% in fiscal 2023, according to the firm’s FY 2023 Ivy report card report.

“If current trends hold, endowments that have higher allocations to private markets, typically larger or more elite schools with well-resourced endowment offices, could struggle relative to smaller endowments that tend to have simpler portfolios with significant exposure to public equities,” says Michael Markov, MPI’s CEO. “Domestic stocks, especially mega-cap technology stocks embodied by the Magnificent 7, are doing well so far in FY 2024. Though rates have jumped recently, bonds have positive performance fiscal year-to-date, too, so schools with relatively more traditional or vanilla portfolios with higher relative exposure to U.S. public markets look set to outperform yet again—should the current asset class performance hold (a big if).”

Will Alt-Heavy Portfolios Shift to Equities?

Likely not, Markov says. “For multiple reasons, it is unlikely that endowments that are heavily allocated to private markets and alternatives veer from the so called ‘Yale model’ after the challenges of fiscal year 2023,” Markov says. “Our research shows that Ivy and elite endowments are risk takers and their portfolios are not particularly efficient. The pressure on valuations and an environment with broken cash flows, deal-making, and fundraising for private markets could also function as a driver of both performance and allocation levels at the schools that have heavy commitments to private markets. Cash distributions to limited partners fell to 11.2% of funds’ NAVs in 2023, the lowest level since the [global financial crisis] and very far south of the 25% median of the past 25-year period.”

Alternative investors are also coping with underfunded commitments, which are at an all-time high, according to data about dry powder, or the amount of money allocated but not yet committed, which across U.S. private equity reached $1.27 trillion as of November 2023, almost double the figure at year-end 2018. Markov says these unfunded commitments could outpace cash distributions by a factor of 8:1.

“In such a capital squeeze environment, being longer-term investors doesn’t exactly help. Even if no new private equity investments are made, endowments will have to fund capital calls from PE funds that they are already invested with,” Markov concludes. “They have no choice. To meet such obligations, they could sell public equities or other liquid investments at a discount and that’s most likely what they have done lately. Our analysis shows that Ivy liquid allocations shrunk in FY 2023. An alternative is to sell private equity to secondaries even at a bigger discount. Either way they lose. This dynamic is likely why you’re not hearing upbeat quotes from Ivy CIOs.”