Are Canadian Endowments Besting American Ones? Maybe.

(February 4, 2011) – With the recent release of the National Association of College and University Business Officers (NACUBO)/Commonfund study that annual tracks endowment returns – which this year showed a solid average investment return of 11.9% — some commentators noticed that Canadian endowments seemed to be outperforming their American counterparts. All is not what it seems, however.

The NACUBO average looks at not just investment returns, but university spending and donations as well. This can cause some confusion. In a report by The Business Insider ranking the “10 best university endowment managers,” three of the endowments on the list were Canadian. However, this misconstrued the point: it’s the endowment as a whole – its fundraising wings, the people who decide what to withdraw, and the investment team – that are responsible for the overall amount of capital in the fund.

“It’s interesting that there’s such a high percentage of Canadian funds on that top 10 list, with so many more US endowments,” Keith Mote, director of consulting at Hammond Associates | Mercer, told aiCIO. Yet, he indicated that it’s difficult to draw hard and fast conclusions about the ranking, which includes figures in terms of total growth of dollars — a net number that includes contribution as well as any spending and thus doesn’t purely reflect investment performance. Nevertheless, recognizing that the numbers may be fuzzy, he said that the growth of the Canadian economy, larger exposure to energy and materials, and the bias toward Canadian investments may be reasons for the success of Canadian university endowments. “From an investment standpoint, Canadian bonds, stocks, and the Canadian dollar have all strengthened, translating to better performance in US dollar terms. It could appear that Canadian university endowments are growing more than their US counterparts because their assets have grown more in some cases” he said.

When asked about the US versus Canadian endowment models, Kristin M. Reynolds, senior consultant on the endowment and foundation team at NEPC, told aiCIO: “I don’t think that performance over the past two years tells us what system is better…Each endowment needs to look internally and find out the mission of the endowment as well as its spending requirement, matching endowment needs to what the assets are supporting,” she said. Reynolds noted that the strength of Canadian university endowments are largely a result of the region’s stringent laws discouraging investment abroad. “Canadian funds have more equity, which performed well, and less alternatives, which didn’t do as well in 2010, than their American counterparts, with a large percentage of their investments coming directly from Canada,” she said.

Observing other trends from the study, Reynolds indicated that the 2008 financial crisis highlighted opportunities in the illiquid space. The Commonfund-NACUBO survey showed some endowments underperformed in 2008 due to illiquid investments and a higher allocation to alternatives — reflecting a rebound in the endowment world as liquidity improved.

Canadian confusion aside, the NACUBO figures do show a striking change in investment performance (yes, investment performance this time) from before the onset of the financial crisis: small endowments now seem to outperform larger ones. Normally, the larger endowments — like Harvard’s, Yale’s and Stanford’s — earn superior returns than the smaller funds. Yet, with a likely lower allocation to alternatives, higher cash positions, and less locked up private investments, smaller endowments outperformed in a reversal from 2008, Reynolds said. She added that the merit of the less liquid model (or the Yale Model), should not be discounted. “This approach is not one size fits all – and it never has been.”

Overall lessons from the crisis can also be drawn from the recently released data. William E. Jarvis, managing director of the Commonfund Institute, commented on the recent endowment study, said the recent study “reflects the heightened importance that institutions are paying to liquidity, cash reserves, and investment policies…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 — in both the US and Canada — have enabled endowments to weather the financial storm.