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Business Officer Magazine

Pace Yourself

The 2005 NACUBO Endowment Study shows healthy gains in all investment pool categories. Individually, institutions are focusing on several growth strategies.

By Karla Hignite

Conducted for NACUBO by TIAA-CREF, the 2005 NES included institutions with endowments up to nearly $25.5 billion. Institutions with a fiscal year ending June 30, 2005, reported an equal-weighted nominal rate of return of 9.3 percent, a decline compared to the average return of 15.1 percent reported in the 2004 NES, but still better than 2003 when returns averaged only 3 percent (see Table 1). Another upside: The three-year average rate of return increased to 9.1 percent in the 2005 NES compared with 3.7 percent in 2004 (a low figure as a result of the FY02 -6.0 average rate of return).

table 1

Although returns for equities were lower in 2005 than in 2004, all six investment pool categories outperformed the S&P 500 on average for U.S. equities, and five exceeded the Russell 3000. Fixed income performance was also stronger than in 2004, which tracks with the Lehman Brothers Aggregate Bond Index. In addition to large endowments growing proportionately larger, results from this year's NES show the continuation of another key trend: the shift away from investment in traditional asset classes and toward alternative assets.

The Alternatives Trend

Compared to findings from last year’s NES, the percent of the investment pool allocated to equity decreased for all investment pool size categories in 2005. The decade-long trend away from traditional assets reveals a steady decline from approximately 90 percent on average combined equity and fixed income in 1996 to 80 percent in 2005, based on equal-weighted averages.

Alternative assets were a clear favorite among institutions with larger investment pools (see sidebar, “Alternative Investments Back on Top”). Hedge funds in particular accounted for about 20 percent of the investment pool of the institutions with the largest endowments; the figure was less than 3 percent for institutions with the smallest endowments. While hedge funds continued to dominate alternative asset classes for institutions of all investment pool categories, institutions with smaller investment pools reported the largest percentage of alternative assets in hedge funds in FY05 and made greater allocation increases.

Private equity and natural resources weren’t left out in the cold, however—allocations in those classes increased as well (see Table 2). The natural resources category benefited from the largest proportional increases: Institutions with greater than $1 billion increased allocations from 2.6 to 3.4 percent, and institutions with $25 million to $50 million raised allocations from 0.2 to 0.6 percent. That proved a smart move for many. By asset class, natural resources and public real estate were the bankable winners in 2005. Average rates of return for natural resources—ranging from 14.2 to 34.3 percent—were surpassed only by those for public real estate investments, which ranged from 22.3 to 36.4 percent.

table 2

738 institutions provided investment pool asset class data in 2005. Table data are equal-weighted unless otherwise noted.  Natural resources include: Timber, Oil and Gas Partnerships, and Commodities.

Of course, rates of return aren’t the whole story behind recent endowment gains for an increasing number of colleges and universities. For each of the five institutions (representing middle and smaller investment pool categories) interviewed for this article, all had either received major gifts or were in the midst of a capital campaign during FY05.

More Than One Way to Grow

While the NES focuses mostly on investment returns and allocations, it’s clear that more institutions are adding to their endowments in significant ways from fundraising efforts. Consider Wright State University and Foundation in Dayton, Ohio, where a $28.5 million donation squeaked in only days prior to the close of the fiscal year. That single cash gift propelled the endowment to $64.3 million and largely accounted for the dramatic 78.7 percent increase in endowment value from FY04 to FY05. While the gift was expected, the amount was greater than anticipated, says Robert Batson, the foundation’s assistant treasurer. Clarkson University, Potsdam, New York, likewise increased its endowment with an influx in excess of $29 million in major gifts during FY05, ratcheting its endowment value to $128 million.

Fundraising focused wholly or in part on growing institutional endowments is gaining traction across the higher education spectrum. As of FY03, Wisconsin Lutheran College’s board mandated adding a minimum of $2 million annually to the college endowment for the next 10 years. That will contribute substantially to the investment pool of this 700-student college in Milwaukee, founded in 1973, where the endowment’s value has already swelled from $2 million in 1996 to nearly $18 million in FY05, says Controller Diane Hoehnke.

These days, public institutions are as likely as their independent counterparts to pursue donor dollars, in part to offset a lack of state funding amid increasing demands to serve more students. Towson University, one of 13 University System of Maryland institutions, is currently in the silent phase of a new seven-year systemwide campaign set to launch this year. Towson anticipates adding 3,000 students between now and 2010 to its current 18,000-student population and growing by another 1,000 for each of the five years thereafter to surpass 25,000 students by 2015. That rise in student count and accompanying demand for additional campus infrastructure will no doubt require a greater partnership role from the university’s foundation, says John Mease, the foundation’s director of finance.

Established in 1970, Towson’s foundation did not undertake a coordinated development effort until the system launched its first capital campaign in 1996. “That’s when we started staffing up to begin generating endowment revenues,” says Mease. Since 1999, Towson has added more than $12 million in new money toward its current endowment value of approximately $19 million. That figure includes the first $4 million of a $10 million pledge from the estate of an alumnus for the naming of the university’s college of science and mathematics, Mease notes. The other $6 million will arrive in $2 million increments for each of the next three years.

Fundraising efforts are also gaining momentum for Golden Gate University, San Francisco. According to Jeffrey Bialik, vice president of operations and chief financial officer, most of the growth to the university’s $24.1 million endowment has come from steady earnings during the past 20 years. Historically, fundraising wasn’t a priority for the institution, which has roots as a YMCA night school. Tuition, while kept low, provided enough operational revenue, explains Bialik. Today, Golden Gate provides primarily business, law, and tax professional education and training for 6,000 students, most of whom attend part time and the majority of whom are enrolled in graduate-level programs. “Under the direction of our current administration, we came to realize we were missing a real opportunity to pursue our growth potential in the undergraduate arena,” says Bialik. Golden Gate is assessing how to double its undergraduate population—currently about 1,200 students—and is in the midst of a $35 million capital campaign, roughly one-third of which will filter into the endowment, with the remainder allocated to fund facilities and current operations.

Bringing in new money is one sure way to grow an endowment. So is keeping tabs on what goes out.

Alternative Investments Back on Top
By Mimi Lord

After four consecutive years of various small endowments dominating the NACUBO Endowment Study’s top 10 performance list, FY05 marked a return to big endowments with hefty portions of alternative investments. Of the top 10 performers, 8 are endowments with more than $1 billion, and only 1 has less than $150 million. In each of the four previous years, the majority of the top 10 performers were endowments with less than $150 million.

The last time this trend was observed was 2000—a year renowned for the tech bubble peak, promising initial public offerings, and huge payoffs in many alternative investments. That year, 7 of the top 10 performers had endowments of more than $1 billion and well-above-average commitments to alternative investments. Unlike 2000, however, the alternative asset classes posting huge numbers in FY05 were not dominated by technology (with the notable exception of Google’s initial public offering in August 2004), but rather by such tangible assets as real estate and natural resources, which posted returns of more than 30 percent. 

Resources count. Over longer periods, large endowments consistently have outperformed small endowments, which isn’t surprising since large endowments generally have bigger staffs, better connections, and greater buying power. These resources enable large endowments to invest more in alternative investments and to earn considerably higher returns on those alternative investments than small endowments. For example, large endowments with more than $1 billion earned an average of 20.3 percent on their venture capital investments in FY05; small endowments with greater than $50 million to less than or equal to $100 million in endowment assets earned 9.2 percent. Similarly, large endowment returns greatly exceeded those of small endowments in private equity (23.9 percent versus 15.3 percent). Within domestic equities, the returns varied only slightly—9.3 percent for the billion-plus endowments versus 8.8 percent for the endowments in the $50 million to $100 million range. 

Healthy helping. Having a healthy helping of nontraditional assets clearly paid off in 2005, as the top 10 performers earned an average return of 20 percent, compared with the 9.3 percent equal-weighted return of survey participants with a June 30 fiscal year. Figure 1 shows just how differently the top performers of FY05 are invested compared to the average endowment. The top performers have less than half the allocations to domestic equities and fixed income than the average endowment but far greater allocations than average to international and alternative investments. (Only 8 of the top 10 performers provided their asset allocations in the recent survey, so the average allocations of those 8 are compared with the equal-weighted average of all participants.)

In general, endowment and other financial officers likely are breathing a little easier than they were a few years ago when the markets plummeted and the economy went into recession. FY05 marked the third consecutive year of positive returns for endowments following two years of losses (see Figure 2). Returns are indicated both by equal-weighted averages and dollar-weighted averages (which weight the larger endowments more heavily).

FY05 was a very respectable year for college and university endowments and one that more closely resembles long-term historical returns than any year this decade. With any luck, perhaps that indicates some degree of sustainability.

MIMI LORD is associate director of the TIAA-CREF Institute, New York City.

figures 1 and 2

Spending Brakes

Duane Schlomer is convinced that the growth success of Wisconsin Lutheran’s endowment has much to do with the institution’s long-time disciplined spending rate. “We’ve never been in the habit of relying on endowment earnings,” says Schlomer, vice president of finance. While the goal is to some day offer more endowment fund earnings as continual revenue streams for the college, he explains, the willpower to hold off for now is key to achieving that goal.

The down markets of the early 2000s led Towson to reassess its former 5.5 percent spending rate. “We began by estimating what we thought our five-year return could achieve, factoring in inflation and administrative fees,” says Mease. The foundation’s current spending rate is based on a projected 8.5 percent annual rate of return during the next five years. The university now reassesses its spending rate annually. New policies in place would allow the foundation to raise its spending rate to a maximum of 6.5 percent, Mease points out.

Golden Gate University has maintained a 4.5 percent spending rate despite market and investment pool performance over the years. According to Bialik, because the university’s endowment is still relatively small, the institution pays more attention to the education market than the economic market. “We continually focus on what students and employers want and what we need to do to serve our specific niche,” says Bialik. This same stay-the-course pace is reflected in the institution’s investment strategy.

Investment Philosophies That Fit

Golden Gate has for years invested endowment funds exclusively with a value-focused manager maintaining a straightforward 60 percent equity, 40 percent fixed income allocation that includes some exposure to international markets but no growth stocks and no hedge funds or other alternative assets, notes Bialik. “The general feeling right now is that our endowment is not large enough to venture into these other areas. We need to keep it simple,” he says. He admits it can require intestinal fortitude not to follow the crowd into each new investment trend. But the institution’s steadfast focus on keeping both feet on the ground bears its own rewards. The university has never experienced negative returns, and FY05 earnings posted a healthy 11 percent.

For the Full Study

The 2005 NACUBO Endowment Study, based on responses from 753 institutions, provides extensive data to help colleges and universities benchmark themselves against their peers. The study (Item No. NC2009), presented on CD-ROM, is available for $74.95 for NACUBO members and $199.95 for nonmembers and will be available this month.

The 2005 NACUBO Endowment Study Executive Summary (Item No. NC2010) highlights the important data and analyzes survey results. The executive summary, which is intended for distribution to presidents and governing boards, is $24.95 for members and $39.95 for nonmembers.

A 35 percent discount is offered for orders of five or more copies of either publication. To place an order, go to or call 800.462.4916. Participating institutions receive a complimentary CD-ROM and can also view the entire report on the Web. Supporting firms also receive a complimentary copy of the report.

For the complete list of participating institutions in the 2005 NACUBO Endowment Study, go to

Golden Gate is by no means alone. Towson employs a more conservative investment approach. In fact, in August 2002 the university pulled its funds from the system’s central foundation because Towson investment committee members were uncomfortable with the more aggressive growth-geared philosophy of the system foundation. “We weren’t convinced it was appropriate for an endowment of our size—at that time, approximately $12 million—to invest in alternative assets,” says Mease. Instead, Towson switched to a passive strategy, investing exclusively in four different funds. Allocations include 60 percent to a domestic equity fund balanced among large-, mid-, and small-cap equities; 8 percent to international equities; 28 percent toward fixed income (23 percent in core fixed income and 5 percent in high-yield securities); and 4 percent in cash.

Clarkson University recently re-examined its portfolio allocation and investment managers. With help from a new consultant, the institution adopted a core-satellite model and hired several new managers. The new model groups conservative allocations at the center surrounded by higher-risk/return investments on the fringes. The university applies this same model within each asset class, explains Clarkson Comptroller James Fish. While allocations remain similar to what they were before—at approximately 70 percent equity to 30 percent fixed income—the university has gradually shifted more to alternative assets including hedge funds, private equities, and venture capital and has increased its non-U.S. equities allocation.

“Overall, we’re more diversified with this new model because we are now dipping our toe into the alternative markets pool,” says Fish. At the same time, the new model helps the university spread its risk. For instance, even hedge fund allocations employ a fund-of-funds strategy involving multiple managers rather than a single manager overseeing the full allocation. This more defined, deliberate approach to balancing higher-risk investment potential with a conservative core so far has Clarkson’s investment committee satisfied that the new model bodes well for future endowment performance. As a small, 3,000-student independent institution, Clarkson relies heavily on tuition to support its operations, says Fish. “One of the long-term objectives for our endowment is to reduce reliance on tuition with increased support from our endowment to help us fund operations and faculty salaries.”

Thanks to Our Study Sponsors

The following firms contributed to the 2005 NACUBO Endowment Study. Without their generous support, NACUBO could not publish so comprehensive an analysis of endowment management practices.

Primary Contributor
TIAA-CREF Asset Management

President’s Circle
Courage Capital Management LLC
Iridian Asset Management
John W. Bristol & Co.
Morgan Stanley Investment Management
Smith Barney Consulting Group
Trusco Capital Management
U.S. Trust
The Vanguard Group

Janus Institutional Asset Management

Callan Associates
Capital Guardian Trust Company
Deutsche Asset Management
Fayez Sarofim & Co.
Merrill Lynch
State Street Global Advisors
Vastardis Capital Services

Babson Capital Management LLC
Goldman Sachs Asset Management

Abbott Capital Management, LLC
Lazard Asset Management
Mellon Global Securities Services
Nicholas-Applegate Capital Management
Northern Trust Company

Wright State has likewise made significant changes, adopting an investment manager-of managers model. “Previously we hired as many as eight separate managers. With this new model, we’ve hired someone to do the hiring and firing of sub-managers for us so that we only need to monitor the performance of one manager,” says Batson. Other changes include the move into international equities, but a conscious decision has been made not to pursue alternative assets. Not yet, anyway, says Batson. Hesitation by the foundation’s board may fade as Wright State’s endowment approaches $100 million—an investment pool benchmark that some experts suggest is an appropriate level for considering alternative assets, Batson notes. In the meantime, efforts will likely begin soon to educate the board and investment committee members about the potential risks and rewards of such investments.

That suggested $100 million milestone hasn’t stopped Wisconsin Lutheran College from heading into the hedge fund and venture capital markets and switching to a more tactical investment manager, says Schlomer. As of June 30, 2005, the college had 20 percent of its endowment funds invested in various alternative asset classes. “We’ve been in a time of transition during the past two years to downsize our fixed income,” he says. Dissatisfaction with bond investment returns is what prompted this bold march into an arena inhabited mostly by the largest investment pool categories. “We don’t really look to pattern ourselves after our peers, and our investment-savvy committee doesn’t see the need to wait to pursue areas of the market where larger endowments have had success.”

Towson may also be nearing a transition point with its investment mix, given the substantial growth of its endowment through contributions. In consultation with its investment consultant, the institution has been exploring possible expansion to include active management versus indexing as well as certain alternative asset classes. Says Mease, “We’re not out to beat any benchmarks, but we do want to get our share.”

Lessons From Finance Class

Neither is Golden Gate chasing above-average returns. “It’s more important to us that we continue to earn our 4.5 percent plus inflation than to earn 20 percent in one year,” says Bialik. “At some point alternative markets will offer a product we would consider. Right now, the question we’re asking is whether we should be looking into growth funds.” That would entail engaging a second investment manager. And in that case, the university would seek out a low-fee manager that does not routinely churn accounts, he says. “One simple way to increase value is to monitor your expenses as well as your asset allocations.”

For Bialik, a sound investment philosophy ultimately hinges on what most campuses of all types and sizes teach in their basic finance classes: Over the long term, you can’t beat the market. “The very nature of an endowment is as a perpetual investment,” he says. “Taking a long-term view for allocations and pairing that with a focus on maintaining the lowest possible expenses means that you may not end up the richest kid on the block, but you should enjoy a steady income well into the future.”

Karla Hignite, principal of KH Communication, Tacoma, Washington, is senior editor of Business Officer.