Tuesday, January 31, 2012
The Wall Street Journal reports today that college and university endowments showed strong growth in FY 2011, according a study released by the National Association of College and University Business Officers (NACUBO) and the Commonfund, a leading investment advisor to endowments and other nonprofits. The article reports that "institutions' endowments returned an average of 19.2 percent for the 2011 fiscal year," up from 11.9 percent in 2010.
As always, the devil is in the details. There are some good breakdowns of this information in the tables that are available at the NACUBO website, which lead to some interesting observations and questions:
1. Compare the average and median investment returns found here with the table showing endowment growth here. The endowment growth table reflects not only investment returns, but also endowment withdrawals, fees, and additional gifts. In the case of the larger endowments, it appears that endowment growth is about the same as, and sometimes above, investment return. As you go down the list, it is clear that the smaller the endowment, the greater the difference between endowment growth and investment return. So I wondered to myself, "Self, does this mean that the smaller endowments are paying out more and/or having a harder time raising additional gifts to replenish the endowment?"
2. To answer my own question, I took a look at the table showing 2011 endowment spending rates, which appears to show that NOT to be the case. In fact, the smaller the endowment, the lower the spending rate. My gut (which cannot and absolutely should not be relied upon as precedent) is skeptical as to whether differences in replenishment fundraising could make up the difference between the larger endowments and the smaller endowments. By the way, no word as to whether or not these rates were affected by the adoption of UPMIFA, or how many would be "underwater" with respect to historic dollar value under UMIFA.
3. This table shows the 1, 3 and 5 year returns - and shows there to be about a 3% difference in rate of investment return between the largest and smallest endowments. At least part of the answer should be that the larger endowments are just getting better returns. (The press release notes that the spread between large and small endowment investment returns is actually more compressed than prior years, which is interesting). But why....?
4. Look at this! The largest endowments have an asset allocation of a whopping 60% (!!!!) in alternative investments, as opposed to only 10% for the smallest endowments. The smaller endowments have a signficant amount more allocated to cash and fixed income than the larger endowments, with only a 9% allocation to fixed income for the largest endowments. The question, of course, is how much does this differential in allocation affect overall investment return?
Now, I'm not an investment advisor nor did I sleep at a Holiday Inn last night, but all of this leads me to worry that some of the lessons of eons ago (like, you know, 2008) are lost already to some. Bad things happen when an endowment gets really illiquid yet keeps spending cash - just ask Harvard. The tables also tell a concerning tale of smaller endowments falling behind with investment returns and reducing spending to keep up with inflation and need, even though UPMIFA should have helped with that to some degree. I wonder if UPMIFA played a role in any of this? It will be interesting to see the analysis of the final report, which according to the NACUBO website, is available for purchase next month.