US Endowments Beaten by Public Pensions in FY2013

(January 28, 2014) — US university endowments performed well in the fiscal year ending June 30, 2013, recording an average net return of 11.7% and bouncing back from a 0.3% decline last year, NACUBO and Commonfund have reported.

Still, endowments lagged behind US public pension funds, which posted a median gain of 12.4% for the same period, according to Wilshire Associates data released last August.

The endowment study, published January 28, included 835 institutions representing $448.6 billion.

It found that domestic equities produced the highest average return of any asset class in endowments’ portfolios at 20.6%. International equities followed at 14.6% and alternatives generated an average return of 8.3% for education endowments. Fixed income and short-term securities/cash lagged behind, with gains of 1.7% and 1.2% respectively.

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“The strong overall performance by endowments is encouraging at a time when the global economy continues its relatively slow recovery from the economic crisis of five years ago,” said Commonfund Institute Executive Director John Griswold. “This year’s investment results reflect in large measure the strength in publicly traded equities that has prevailed since early 2009.”

According to the report, the endowments averaged a net five-year return of 4% and net 10-year return of 7.1%. Institutions with larger endowments outperformed smaller funds. Over the last 10 years, those in 75th percentile by assets gained 7.8% annually, compared to the 25th percentile’s 6.3%.

“While larger endowments have performed better over the long-term 10-year period, smaller endowments with higher allocations to domestic equities have done well in the shorter term—a result that has enabled them to continue to support their educational missions,” Griswold said.

Of various alternative vehicles, distressed debt generated the highest average return at 14.8%, followed by marketable alternatives at 10.5%. Private equity returned 9.1%, the study found.

“This relative pause in the decade-long growth of alternative strategy allocations will bear watching in future years,” he said.

Asset allocations remained steady in fiscal year 2013, with little change from 2012. Participating endowments allocated 16% to domestic equities, 10% to fixed income, 18% to international equities, 53% to alternatives, and 3% to short-term securities and cash.

While NACUBO and Commonfund’s preliminary data reported a seven percentage point drop in allocations to alternatives during the 2013 fiscal year—from 54% to 47% of portfolios. The final report, however, only indicated a 1% fall. Significant increases in private equity allocations by several large institutions accounted for the difference, according to Griswold.

Harvard University was ranked at the top of the list again this year for total assets under management, adding $2 billion to its $30 billion endowment. Yale University was the second richest school, according to the report, with $20 billion in assets in 2013, up from $19.3 billion last year.

However, expanded portfolios and good investment performance was not enough to put universities at ease, according to the report.

“Despite the improvements in investment returns over the past year, colleges and universities are in a period of rethinking their budget-setting strategies and priorities,” John Walda, NACUBO president and CEO, said. “We have gone through a great period of volatility in the financial markets over the past 10 years, along with deep cutbacks in government funding for higher education and declines in enrollment and tuition revenue at some schools.”

Average total debt increased in fiscal year 2013 to $204.3 million from $187.5 million last year, while average spending rate gained 0.2% from last year, reaching 4.4%.

JP Morgan Asset Management’s Paul Sweeting has taken experiences from around the world and come up with the ultimate defined contribution plan blueprint.

(January 28, 2014) — The world’s best defined contribution (DC) fund would be a combination of Denmark’s ATP, Switzerland’s occupational benefits system, and the Chilean advanced life delayed annuities, according to JP Morgan Asset Management.

Paul Sweeting, head of strategy for Europe at the firm, has spent the past few months analysing DC funds from around the world in the hope of finding transferable models which could be used to create the ultimate DC pension.

While each model has been designed to fit the specific parameters of their demographics and regulations, there were many aspects which could be transported, he found.

The best format, Sweeting decided, was for a combination of drawdown funds and collective annuitisation in large-scale, multiemployer pension funds.

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There are two levels suggested for the basis of a DC fund: a basic level and a supplementary level. The basic level would borrow heavily from ATP’s system, and includes the following features:

1) A contribution based on a fixed percentage of earnings, 80% of which should be paid into a matching fund to ultimately provide a collective deferred annuity;

2) The matching fund should invest in assets which have cash flows that match annuity payments;

3) The remaining 20% should be invested in a growth fund which would go towards paying the collective current annuities and covering any falls in the matching fund due to longevity increases;

4) This growth fund would not be guaranteed, but it would have to be completely exhausted before any benefit payments could be cut; and finally

5) Actuarial adjustments could be used to increase the retirement age if longevity increases resulted in the growth fund being used more to fight that problem than to fill any shortfall in the matching fund

Importantly, the choice of whether to defer their annuity or take the current collective one would be down to the individual.

For the supplementary level, Sweeting borrows from the Swiss occupational pensions system and Chile’s advanced life delayed annuities.

Unlike the basic level, 80% of contributions would go into a target date fund intended to convert to a decumulation fund at retirement, 16% of the contributions would be paid into a matching fund that would be channelled into the advanced life delayed annuities, and 4% would go into the growth fund.

“This approach would allow investors to take more risk with assets at the basic level, but would convert the decumulation challenge from an open-ended problem to one with a fixed endpoint,” Sweeting wrote.

“Furthermore, because the advanced life delayed annuities would be collectively provided, they would not attract the significant capital requirements associated with the policies provided by insurance companies.”

The payback for all of this is that the ultimate guarantee behind pension funds would be lost, Sweeting said, but the growth fund should provide a significant cushion against an economic disaster affecting pension payments.

The full paper, which also includes analysis of the UK’s proposed defined ambition idea and further investigation of how a drawdown fund should be created, can be found here.