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RiskJanuary 30, 2020

University Endowments Gain 5.3% in 2019

However, the average 10-year return beat long-term objectives for the first time in a decade.

By Sarah Min

Colleges and university endowments in the US generated a lackluster 5.3% average return net of fees in fiscal year 2019 — a drop from 8.2% the year prior — based on recession fears that pummeled market returns, report says.

Diminished performance in both US and non-US equities during the one-year period from July 2018 to June 2019 contributed to muted endowment gains, according to a joint study released Thursday from NACUBO-TIAA, an industry group and insurance company. The report reviewed 774 institutions holding roughly $630 billion in assets.

In public equities, global equity markets gained just 5.7% in fiscal year 2019, down from 10.7% the prior year. In the US, the S&P 500 posted returns of 10.4%, down from 14.4%.

However, the average 10-year return at all institutions, at 8.4%, beat long-term objectives for the first time in a decade, thanks to the long recovery of the market following the 2008 financial crisis. The strong returns have helped universities increase their withdrawal spending by more than $2 million, including allotting nearly half their spending to student financial aid.

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But researchers advised endowment managers against relying on the number as a reference for future planning and spending, as it is indicative of just one segment of the market cycle. In fact, long-term endowment return objectives are trending downwards at investment oversight committees, the report said.

The 10-year return “is reflective of the incredible bull market that we’ve had coming out of the great financial recession,” Dimitri Stathopoulos, head of US Institutional at Nuveen, a TIAA company, said during a conference call with reporters.

“As we move forward, especially in looking at where the industry’s expectations are for capital market returns, it’s going to be harder and harder to continue to get those types of returns,” he added.

Institutions with endowments larger than $1 billion reaped the greatest annual rewards, posting an average gain of 5.9% for fiscal year 2019 and beating the average total institution return of 5.3%. Greater exposure to private equity and venture capital investments helped them outperform all other asset cohorts.

Only the smallest asset classes under $50 million also beat the annual total institution return, punching above their weight thanks to better exposure to US public equity. Endowments with $25 million to $50 million in assets posted a 5.5% gain, while the ones under $25 million generated a 5.8% return.

Small-Cap Stocks to Stay in the Wake of the Big Boys, LPL Says

While small names have done OK, they suffer from factors like a possibly weakening dollar, the firm’s John Lynch argues.

By Larry Light

The woes of small-cap stocks continue, with no end in sight. That’s the conclusion of LPL Financial’s chief investment strategist, John Lynch.

This has been the day of the large capitalization stock, with monsters like Facebook and Apple tearing up the track. The Russell 2000, which tracks small stocks, has lagged significantly the large-cap index, the S&P 5000. Sure, the small fry stocks have done better lately, but not as well as their big brothers.

As Lynch wrote in a research note, “the Russell 2000 has struggled to notch its first record high since August 2018.” The S&P 500 has garnered 42 record highs since then.

Currency fluctuations could hurt the small names ahead, Lynch said. Usually, small caps benefit from a rising US dollar, because they get most of their revenue domestically. Then, the large caps, often with significant overseas operations, find their foreign-earned income diminishes when brought home, Lynch emphasized.

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Now, there are indications that this headwind for large caps may be going away. Lynch said the dollar shows signs of weakening, which would whittle away this small-cap advantage.

“Small caps may eventually reach that coveted record-high status, but we think it’s unlikely they’ll pull ahead meaningfully this year,” the LPL strategist wrote.

Indeed, the performance gap between the two types of stocks has widened. Over 10 years, the S&P index has posted a 14% average total return (price performance plus dividends) versus the Russell benchmark’s 12.1%. But during the recent five-year span, the S&P clocked a 12% gain, with the Russell mustering just 8.2%.

In 2018, the worst year for stocks in the past decade, the large-cap index slid only 4.5%. The Russell dropped almost three times as much, losing 11.1%. And this year, the small-cap index is down 1%, and the large-cap one is up 1.5%.

On Jan. 16, the small-cap barometer came within 2% of exceeding its all-time high, reached in mid-2018 (this happened before stocks tumbled in that year’s nasty fourth quarter). Then, amid market jitters over the coronavirus, small caps fell back.

As Lynch put it: “Stock markets around the world have hit new record highs this year, but US small-cap stocks have yet to join the party.”