Endowment Study: Institutions Boast Investment Returns Averaging 19.8% in Fiscal Year

(November 7, 2011) — Institutions’ endowments in the United States returned an average of 19.8% — net of fees — for the 2011 fiscal year, new data from the Commonfund Institute and the National Association of College and University Business Officers (NACUBO) shows.

“What stands out in these preliminary figures is the fact that, despite the positive returns of this year and last, endowments still have not completely recovered from the damage inflicted by the market declines that accompanied the 2008-09 credit crisis,” NACUBO President and Chief Executive Officer John D. Walda and Commonfund Institute Executive Director John S. Griswold said in a joint statement. “The average endowment is still at only 86% of its value in FY2007, using return data from past NCSE reports and a 5% spending rate,” they noted, “and longer-term returns for five- and ten-year periods are only 5.0% and 5.5%, respectively – not significantly higher than the spending rate for many institutions. It will take several more years of positive returns for endowments to recover fully from the crisis.”

The analysis revealed that while average returns were quite similar across size groups, the way they were earned varied widely. Institutions with assets over $1 billion reported allocations to domestic equities that averaged just 12%. Meanwhile, at the opposite end of the size spectrum, endowments with assets below $25 million reported a 41% allocation. At the same time, the two largest size cohorts reported average fixed-income allocations of 10% or less, while the three smaller size cohorts all had average fixed-income allocations in excess of 20%.

With respect to alternatives, the research demonstrated that institutions with assets over $1 billion reported an average allocation of 58%, while institutions with assets under $25 million reported an average alternatives allocation of 9%. In general, allocations to international equities and short-term securities/cash/other were more consistent across the size cohorts.

The preliminary data was gathered from 284 US colleges and universities. Researchers are still gathering data for the full 2011 NACUBO-Commonfund Study of Endowments (NCSE), with final results to be released in late January.

While the data still reflects the painful blow institutions suffered following the financial crisis, it paints an increasingly optimistic picture about the future of US college and university endowments. The 19.8% investment return calculated for the 2011 fiscal year contrasts with the average 11.9% investment return for 2010. 

“The study reflects the heightened importance that institutions are paying to liquidity, cash reserves, and investment policies,” William E. Jarvis, managing director of the Commonfund Institute, told aiCIO in late January, following the release of the 2010 fiscal year results. “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 have enabled endowments around the country to weather the financial storm.

The highlight of the 2010 NACUBO-Commonfund Study, Jarvis believed, was the importance of investment policies to counter the temptation of external pressures in addition to the human psychology of investing. “The downturn was no blessing in disguise. It was a catastrophe,” he said, adding that with that catastrophe came the lesson that institutions should stick to highly diversified strategies over the long-term. “You need investment policies written down to be a guide to get you through stressful times.”