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Business Officer Magazine

What Goes Up…

The 2011 NACUBO–Commonfund Endowment Study held some good news: FY11 average returns were up 19 percent. But, market volatility could pull lofty outcomes back to earth.

By Kenneth E. Redd

*After a long, dark period that began three years ago, FY11 finally brought several signs of recovery in the economy and financial markets that benefited investors and money managers. The U.S. economy began to pick up, as the gross domestic product (GDP) grew more than 4 percent from July 1 to Dec. 30, 2010, and gained more than 2 percent by June 30, 2011. In Europe, the sovereign debt crisis that threatened to send Greece and other nations into default on their government debt showed some signs of abating, with France and Germany appearing to lead the way toward stability.

These signs of life in the economy gave long-suffering investors a sudden 
jolt that buoyed their portfolios. The Standard & Poor's 500 index, which languished for much of the past three years, surged 30 percent during the July 1, 2010, to June 30, 2011, time span. International stocks followed suit, with the Morgan Stanley Capital International (MSCI) World Except U.S. index jumping 30.9 percent during the year.

College and university endowment managers also benefited from the improved outlook. According to the 2011 NACUBO-Commonfund Study of Endowments (NCSE), on average, endowments returned 19.2 percent in 2011, the best showing in the NACUBO endowment study series since FY97, and a vast improvement over the average return of 11.9 percent in 2010 and –18.7 percent in 2009.

Get the Full Study Online

The 2011 NACUBO-Commonfund Study of Endowments (NCSE), based on responses from 823 U.S. college and university endowments and affiliated foundations, provides extensive data to help colleges and universities compare their results by endowment size and institution type. Tables, charts, and graphs include data on investment performance, asset allocation, spending rates and policies, institutional debt, management expenses, and governance issues.

The final report (Item No. NC4063), available on NACUBO's Web site, is $100 for NACUBO members and $700 for nonmembers. Purchase of the study allows institutionwide access to the results. To order, go to NACUBO-Commonfund Study of Endowments.

But any investor's sighs of relief brought about by the FY11 gains were short-lived. As the new fiscal year began on July 1, 2011, the U.S. economy slowed to a crawl, with the rate of growth in GDP rising by less than 2 percent. In Europe, the sovereign debt crisis grew even worse, with Greece teetering on the brink of an outright default that many feared would spark another worldwide financial crisis. Stock prices have thus swung wildly through much of the first half of the new fiscal year, with the S&P 500 index dropping 15 percent in the first quarter before recovering some losses by the end of the second quarter. The volatility that engulfed much of the financial markets in 2008–09 thus seems to have returned with a vengeance since the end of FY11.

This year's overview of the 2011 NCSE results takes a look back at the successes of 2011 and includes: (1) a review of the strategies that institutions used to help them benefit from the market rise, and (2) the ways that the newfound strength assisted in rebuilding and achieving something of a bounce-back from the devastation of the financial crisis. This year's review also assesses the challenges endowment managers have had to surmount in the first half of FY12 and how they plan to move forward in spite of these new obstacles.

Riding on Auspicious Winds

In FY11, 823 U.S. endowments and affiliated foundations participated in the NCSE, the third-highest number of participants in the 41-year history of NACUBO's endowment study series. Collectively, respondents' endowments totaled $408.1 billion. The average endowment of this year's NCSE participants was roughly $495.9 million, while the median was about $90.9 million.

As Table 1 shows, endowments of all size categories recorded by the NCSE had particularly strong performance in FY11, especially when compared with the 2010 survey results. The largest endowments (over $1 billion) led the way with an average FY11 one-year gain of 20.1 percent, a nearly 8 percentage point jump from the year prior. But even the smallest endowments enjoyed a 6 percentage point improvement in their results—from 11.6 percent in 2010 to 17.6 percent in 2011. Over the past 10 years, endowments achieved a nominal rate of return of 5.6 percent on average. Ten-year results for institutions with endowments greater than $1 billion were slightly better (6.9 percent) than those of the smallest endowments, under $25 million (4.8 percent).

These results suggest that institutions with both large and small endowments made several key strategic changes in their asset allocations during and after the 2008 financial crisis that paid off handsomely during the market resurgence in 2011.

Advantageous adjustments. For example, endowment managers at Purdue University, West Lafayette, Indiana, made a minor adjustment that proved particularly beneficial. “Our success in the past two years came primarily from maintaining our investment policy's diversified asset allocation targets, with one exception: an underweight to private real estate, balanced by a similar overweight to public equities,” says 
James S. Almond, senior vice president of business services and assistant treasurer.

Good timing for equities. Any shifts in allocations to stocks in 2011 were especially helpful, as Table 2 illustrates. During the year, on average, domestic equities in college and university endowments returned 30.1 percent, while international stocks gained 27.2 percent. These gains were a sharp jump from the stock returns recorded by the 2010 NCSE. Purdue's shift to equities was one factor that helped produce a 23.7 percent return in FY11 for the endowment, which totaled approximately $2 billion at the end of the fiscal year.

Strategic diversification. Purdue University and other institutions, such as Stetson University, DeLand, Florida, also benefited from well-timed shifts to international and high-yield bonds during and after the 2008 market downturn. “The portfolio's diversification into noncore, global fixed income was the largest relative contributor versus the performance of domestic core fixed income,” says Robert Huth, Stetson's vice president of business and chief financial officer. “This allocation began in August of 2008 during the heat of the financial crisis.” Stetson University's $143.9 million endowment returned 20.3 percent, according to the NCSE.

Purdue University also made a shift to higher-yielding bonds during the financial downturn. “In the first quarter of 2009, our investment committee made a 3 percent opportunistic allocation to high-yield bonds to take advantage of the mispriced debt,” Almond says. “In November 2009, we liquidated the position, and Purdue harvested significant gains in a very short period of time based on the market dislocation.”

On the defense. Other institutions, such as the Valencia Foundation, Orlando, made defensive shifts at the height of the market disruptions in order to reduce their losses and position themselves for future growth. The $71 million foundation, which returned 19.3 percent in FY11, “expanded our allocation to cash and maintained our investment in the hedge fund” during the financial downturn, says Michelle Matis, vice president for finance and administration. The foundation also used percentage ranges for asset allocations rather than specific target numbers. “That gave the investment pool some breathing room so we didn't constantly have to rebalance, and enabled us to benefit from those assets that were still performing well, and give those that were underperforming a chance to sit back and recover,” explains Matis.

Rebuilding Underwater Funds, Increasing Spending

We Appreciate Our Study Sponsors

The following firms contributed to the 2011 NACUBO-Commonfund Study of Endowments. Without their generous support, NACUBO and Commonfund would not be able to gather and publish so comprehensive an analysis of endowment management practices.


Commonfund Institute


Graystone Consulting, a business of Morgan Stanley Smith Barney LLC

J.P. Morgan Asset Management

John W. Bristol & Co.

Russell Investments


Baker Tilly Virchow Krause LLP

Bernstein Global Wealth Management

BNY Mellon Asset Servicing

Callan Associates Inc.

LCG Associates Inc.

Pathway Capital Management

Prime, Buchholz & Associates Inc.



Mercer Investment Consulting


Asset Strategy Consultants

Atlanta Consulting Group/Morgan Keegan

Mason Investment Advisory Services

While impressive, the FY11 NCSE results should be placed in a larger context. The long-term goal of most institutions is to produce annual returns during 10 years of at least 7 percent, in order to account for inflation and annual spending withdrawals. As Table 1 suggests, most institutions have not met this standard during the past 10 years, and it is likely that many endowments have lost ground despite the positive 2011 returns.

In fact, a number of institutions have used the investment gains from the past three years to rebuild endowment funds that were “underwater” (below their original value). During that time, the percentage of endowment dollars that were underwater fell from about 22 percent to below 5 percent (see Figure 1). For the smallest endowments, the share of assets underwater fell even more dramatically—from 26 percent to below 4 percent.

The focus on shoring up underwater funds does not mean that institutions reduced their endowment withdrawals—on the contrary, a number of schools increased their endowment spending rates as well. The average effective spending rate for all NCSE participants increased slightly, from 4.5 percent to 4.6 percent. About 51 percent of all institutions increased their spending dollars in 2011.

Purdue University raised its effective spending rate to 5 percent in FY11. As Almond points out, “Our investment committee felt this change was prudent because our scenario analysis found only a small statistical difference in Purdue's ability to preserve intergenerational equity over the long term using the higher spend rate.”

Playing Defense

Like a balloon falling back to earth, the good economic news investors enjoyed in FY11 suddenly reversed itself at the beginning of 2012. Thus far, the year has featured volatility and unpredictability in stock, bond, and other asset class prices. As the New York Times and other publications have recently reminded us, consumers and investors are once again being affected by stubbornly high unemployment and below-average economic growth in the U.S., and continuing troubles in Europe with sovereign debt and other economic problems. These factors contributed to wild swings in the market during the first half of FY12 (July 1 to Dec. 31, 2011). In this brief time period, the S&P 500 index experienced 33 days that were up or down by 2 percent or more, according to calculations from Yahoo! Finance. Overall, the index returned –3.7 percent in the first half of the fiscal year. Foreign stocks did even worse, with the MSCI returning roughly –16.2 percent in this period.

The return of turbulence in the financial markets came at the same time many states began to report continued fiscal challenges that first emerged in summer 2008. The fall 2011 Fiscal Survey of the States, sponsored by the National Association of State Budget Officers (NASBO), found that 29 states have budgeted for lower general fund spending in FY12 than they did in FY08. As a result, there will continue to be pressure to reduce state spending for higher education and other services.

Investment losses, compounded by reductions in state and other support, will undoubtedly adversely affect both public and private universities. At Stetson University, which returned approximately 
–5 percent from July 1 to Nov. 30, 2011, “there is a possibility that state scholarship aid to students will be reduced, thereby increasing the amount of aid the university will need to provide,” Huth says. “This would need to be covered by a combination of cost cutting and other revenue increases where possible.” Purdue University, which saw its endowment return approximately –5 percent in the July 1 to Oct. 31, 2011, time span is also facing budget reductions due to falling state support. “The university has spent significant effort in evaluating and implementing cost-saving initiatives in addition to budget reductions and reallocations during this financially constrained period,” Almond says.

With these new challenges in mind, college and university endowment managers appear to have again shifted strategies slightly—going from bonds and equities that presented attractive opportunities for gains to those that are more defensive—but still with an eye toward growth in case the markets suddenly recover again.

Stetson University, for instance, is making some minor adjustments in real estate and fixed-income allocations to support income growth, while at the same time looking for investment opportunities that have potential for long-term gains based on any reductions in other asset classes. “The portfolio's long-running theme has been to seek attractive investment and diversification opportunities that fall within our investment policy,” Huth says. “This philosophy has historically led the portfolio to consider investments in the context of 'if' and not 'when' they are made.”

As Almond points out, finding these new opportunities and deciding when to take advantage of them will not be an easy task. “The issues in the U.S. and Europe have resulted in the potential for a low-return volatile market that is difficult to predict—similar to the situation we faced in 2008. This environment raises the bar for potential investment opportunities. Finding well-defined investment opportunities is not a simple task when the market can move quickly.”

While looking for new opportunities is important, Matis suggests that remaining focused on long-term goals is key for surviving these periods of turbulence. “We have to keep reminding ourselves that our investment pools were set up for the long haul,” she says. “We can't get sucked into the emotional pull of wanting to stop the losses by selling off investments. That would significantly increase the pool's recovery time.”

NCSE Results Discussed

Participants in a February 2 webcast, “Understanding the 2011 NACUBO-Commonfund Study of Endowments,” heard an in-depth discussion of the study results.

Given the ongoing uncertainty being faced by campus investors, Huth, Matis, and Almond suggest that college and university investment committees will play a key role in any future shifts in investment policy and asset allocations. “Our advisory committee will maintain its long-term focus but most likely spend additional time and resources considering more 'limited-term' investment opportunities,” Huth says. At Purdue, “the investment committee has reviewed the asset allocation, spent considerable time with our current managers, and evaluated potential new managers to make sure we have the right opportunities available when changes need to be made.”

Portfolio review will remain a focus of the Valencia Foundation's advisory committee as well. “At least twice a year we take a close look at the asset allocation to see where we need to make tweaks or whether it's time to introduce a new fund or even a new asset class,” says Matis. “Educating the finance committee about new and different types of investments within the different asset categories is a constant job for us. Even if they decide not to add an allocation to a new fund or type of investment, they still need to know what options exist in order to make an informed decision.”

But it is equally important to note that the recent investment losses and funding reductions are not keeping endowment pros from focusing on their main goal: providing the resources their institutions need to serve their students effectively. “Our No. 1 priority is the preservation of the endowment's corpus for future generations of Boilermakers,” Almond says. “Student success is a priority as we work to enhance retention and graduation rates, and I don't see that changing. It's all about student success.”

KENNETH E. REDD is director of research and policy analysis at NACUBO.