University endowments earn 19.2 percent

University endowments
University endowments

Endowments at U.S. colleges and universities earned an average of 19.2 percent on their investments in fiscal 2011, the second steep annual climb following two years of recession-induced declines, a new report says.

The strong performance for the year ended June 30, 2011, builds on an average return of 11.9 percent in 2010 and eclipses the 18.7 percent drop in fiscal 2009, says the 2011 NACUBO-Commonfund Study of Endowments.

The two-year positive trend is good news, but still not enough to bring the three-year average annual return of 3.1 percent up enough to cover the average spending rate of 4.6 percent, says the report from NACUBO and the Commonfund Institute.

And when adding inflation to the spending rate, longer-term average returns remain inadequate, says the report, which includes data from 823 schools that together have $408.1 billion in endowment assets.

“Adding inflation and costs totaling roughly 3 to 4 percent, and an average annual return of between 8 and 9 percent is necessary just to stay even,” John Walda, president and CEO of NACUBO, and John Griswold, executive director of Commonfund Institute, say in a statement. “But with 10-year returns averaging just 5.6 percent, higher returns will be necessary to maintain endowment values over the long term.”

The five-year average annual return now stands at 4.7 percent, while the 10-year average is 5.6 percent.

All asset classes saw positive returns for fiscal 2011, with domestic equities earning 30.1 percent, almost twice their performance in 2010 and more than any other asset class.

International equities earned 27.2 percent; alternative strategies earned 14.1 percent; fixed income, 6.5 percent; and short-term securities and cash, 0.5 percent.

Within the alternative-strategies category, commodities and managed futures earned 26 percent, followed by energy and natural resources, with 23.5 percent, and venture capital, with 21.7 percent.

Although domestic equities carried the highest average return for fiscal 2011, only 16 percent of endowment portfolios were invested in that asset class.

The majority of assets, 53 percent, were allocated to alternative strategies, while 17 percent were in international equities; 10 percent in fixed income; and four percent in short-term securities or cash.

And while larger endowments historically have enjoyed better returns than smaller ones, the 2011 study shows only a small difference, with endowments of $1 billion or more earning an average of 20.1 percent, and those with assets under $25 million earing 17.6 percent.

Gifts and donations seemed to be on the upswing in 2011, with 46 percent of colleges and universities reporting increases, compared to 43 percent in 2010, and 31 percent reporting a drop in contributions, a better showing than the 42 percent that saw a drop during 2010.

At the same time, the average long-term debt held by universities grew to $189 million at the end of fiscal 2011, up from $181.5 million in 2010 and $167.8 million in 2009.

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