Home ListingJune 13, 2013

Mid-Size Endowments Miss Bond Bandwagon

<em>Data shows returns are negative for mid-tier endowments.</em>

Reported by Featured Author

(June 13, 2013) — Data gathered from 831 US colleges and universities found the endowments from these institutions returned an average loss of 0.3%, net of fees, for the 2012 fiscal year.

This marks a steep decline from the year before, when the average return made by endowments was 19.2%, net of fees.

Larger funds performed the best, according to the 2012 NACUBO-Commonfund Study of Endowments. Those with more than $1 billion in assets returned an average of 0.8%, and endowments with between $501 million and $1 billion in assets reported an average return of 0.4%.

The smallest funds, those with assets under $25 million, were also in positive territory reporting an average return of 0.3%.

So what was dragging the overall average down? The medium-sized endowments. All three of the mid-sized cohorts reported negative returns, the biggest being a loss of 1.0% among institutions with assets between $51 million and $100 million.

Institutions with assets between $101 and $500 million saw losses of 0.7%, while those with assets between $25 million and $50 million returned losses of 0.5%.

The poor performances might at least be partly blamed on the mid-tier endowments’ allocation strategy.

The data show that fixed income investments generated the highest return, an average of 6.8%, while international equities produced the biggest loss of 11.8%. Domestic equities returned 2%, alternative strategies as a group returned 0.5%, and short-term securities/cash/other returned 0.2%.

Both the largest and smallest endowments benefitted from the strong fixed income run during 2012. Endowments with assets of more than $1 billion reported the smallest fixed income allocation, at 9% they realized the highest return from this asset class, an average of 9.1%.

At the other end of the spectrum, endowments with assets under $25 million benefited from the largest fixed income allocation, at 29%, despite reporting the lowest return, an average of 6.1%.

The long-term trend of increasing allocations to alternative investment strategies was observed once again in 2012; alternative strategies including private equity, marketable alternatives, venture capital, private equity real estate; energy and natural resources, and distressed debt.

The alternatives allocation was correlated by endowment size, with institutions having endowment assets in excess of $1 billion reporting a 61% allocation to alternatives and those with assets under $25 million reporting an average allocation of 11%.

Other points of note from the report included 39% of institutions reporting a decrease in the number of gifts they received from donors from the previous year, but another 41% reported an increase.

The median total of new gifts was $2.2 million in for the full 2012 year, while the average total of new gifts was $8 million. Gifts were correlated with the size of the institution’s endowment; both median and average gifts were highest, by far, among institutions with assets of more than $1 billion.

In addition, Of the 831 study participants, 71% said they did not apply environmental, social and governance (ESG) criteria to portfolio holdings, the same percentage as reported last year.

Of the 149 institutions with some form of ESG policy, 60.1% of their portfolio reflects the use of negative screens, 49% of them vote proxies consistent with their ESG criteria, and 72% report that ESG investing is a formal institutional policy.

Perhaps returns would have been better if more of the endowments were run with ESG in mind: Deutsche Bank revealed evidence that investing in “good” companies will help improve overall returns.

Negative screening, adopted by the 60.1% of ESG converts mentioned above, is not enough however-technical implementation is essential too.

The study’s author Dr Andreas G. F. Hoepner suggested ESG datasets should be included on a wider analytical level, citing labour happiness (thus retention and productivity) and energy consumption (thus costs and potential levies) as important factors to consider when stock picking.

You can read the whole of Dr Hoepner’s paper here.