New Normal: Endowments Becoming Volatility Conscious
February 1, 2013
The nation’s endowment pools, ranging to those of community colleges down Main Street to the larger research institutions in Cambridge, Mass., recorded an average -0.3% return over the course of the prior volatile fiscal period, according to the 2012 NACUBO-Commonfund Study of Endowments.
In the fourth annual study, which included 831 colleges and universities varying in endowment size from over $30 billion to under $1 million, the joint analysis by the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute listed that returns did not continue their bounce back trend in 2012.
Verne Sedlacek, president and CEO of Commonfund, said Thursday morning that college universities have in effect “lost ground when you adjust for inflation” following the last 10 year period, which has been rife with problems due to the financial crisis and the great recession.
In October 2012, preliminary figures compiled by the joint study reported that the sample reached an -0.3% return for the year that ended June 30. Roughly 463 schools were tallied at the time.
Previously, in January 2012, the 823 institutions included in the 2011 recap hit an average 19.2% return net of fees, indicating a 11.9% improvement in returns from the prior year, the third annual joint study listed.
“…Even though we had a really great year, many of our institutions are still not at a point where they’ve recovered, in terms of value, from the recession,” NACUBO President and CEO John Walda said early last year. “47% of the institutions participating in both 2009 and 2011” are still below.
Similarly, Walda’s comments in New York City yesterday indicated that universities’ increased spending in 2012 from postings in 2011. He noted that 8.7% of the operating budget comes from endowment funds.
“….These increases are quite important, and would suggest they are making up for other revenue,” Walda said. Many “view endowments as one part of the solution to financial pressures,” he added.
The race to catch up was not assisted by the dismal returns recorded for international equities’ -11.8%, -10.1% posting for commodities and managed futures, -1.2% for hedge funds and -0.8% for energy and natural resources.
It was a “terrible year for active management,” Sedlacek added, when comparing the nearly S&P’s 5.5% return to that of domestic equities’ 2% return for the same period.
However, fixed-income, private equity and venture capital management techniques had very good years for the sample group of endowments.
When asked about what the future holds for hedging vehicles, Sedlacek explained the strategies were doomed for poor performance due to it being “a function of active management.”
“I don’t think that they have any massive outflows from hedge funds, but it’s something that people certainly question,” Sedlacek noted.
In terms of management of assets, Walda commented that “volatility is something that the managers of endowments have learned to live with and deal with, and I think it’s a part of the reality going forward as well.”
“The long-term goal of most endowments are to exist in perpetuity, and grow at the rate of inflation, while spending a portion on current operations,” Commonfund’s leader commented this week. “That portion on general operation is between four and five percent of the value of the endowment.”
Sedlacek added that average cost of operation have grown 3.8% each year.
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