Data gathered from 835 U.S. colleges and universities for the 2013 NACUBO-Commonfund Study of Endowments (NCSE) show that these institutions’ endowments returned an average of 11.7% (net of fees) for the 2013 fiscal year (July 1, 2012 – June 30, 2013). The FY2013 return represents a strong recovery from the -0.3% return reported by study participants for FY2012.
Endowments remain a significant source of support for higher education. Participating institutions reported that an average of 8.8% of their operating budget is funded by their endowment, ranging from a high of 16.2% for institutions with assets greater than $1 billion to a low of 2.5% for institutions with assets less than $25 million.
Domestic equities generated the highest average return in FY2013, at 20.6%, followed by international equities, at 14.6%. Alternative strategies returned 8.3%, fixed income returned 1.7% and short-term securities/cash/other returned 1.2%. (All returns are reported net of fees.)
Among the various alternative investment strategies, distressed debt produced the highest return, at 14.8%, followed by 10.5% for marketable alternatives (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives). Private equity (LBOs, mezzanine, M&A funds and international private equity) returned 9.1%, while private equity real estate (non-campus) returned 8.5% and venture capital returned 6.1%. Commodities and managed futures returned -6.1%, the year’s only investment strategy to report a negative return.
Participating institutions’ trailing three-year returns averaged 10.2% and, like the FY2013 returns, were separated by just 60 basis points from high to low. Trailing five-year returns averaged 4.0%, with the return spread widening to 110 basis points. Trailing 10-year returns averaged 7.1%, with an even wider 200-basis-point spread from high to low.
Participating endowments reported the following average dollar-weighted asset allocations in FY2013 (with comparable FY2012 figures in parentheses):
- Domestic equities: 16% (15%);
- Fixed income: 10% (11%);
- International equities: 18% (16%);
- Alternative strategies: 53% (54%); and
- Short-term securities/cash/other: 3% (4%).
Among alternative strategies, the largest allocation, at 20%, was to marketable alternatives, followed by private equity at 12%. Other allocations were energy and natural resources, 5%; private equity real estate (non-campus), 7%; venture capital, 4%; and distressed debt, 2%.
In a new area of inquiry, the study found 50% of participating institutions employ risk limits in their portfolios, while 28% said they do not. Seventy-two percent of this group use volatility calculations, such as standard deviation, and 55% use measures such as alpha and beta. Forty-one percent of all study respondents reported using stress testing or scenario analysis for their portfolios.
Of the 835 study participants, 18% said they apply environmental, social or governance (ESG) criteria to portfolio holdings. Of the 157 institutions with some form of ESG policy, 58.6% of their portfolio reflects the use of negative screens. Forty-eight percent of these institutions vote proxies consistent with their ESG criteria; 70% of these institutions report that ESG investing is a formal institutional policy.
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