University endowments gained 11.7 percent on average in the year ended June 30 as stock markets fueled a rebound from a 0.3 percent loss a year earlier, the National Association of College and University Business Officers and Commonfund Institute said.
Universities with smaller endowments produced returns equal to or better than wealthier schools because they keep much of their money in traditional stocks, rather than alternative assets like hedge funds and private equity, according to the annual Nacubo-Commonfund endowment report.
Smaller universities “are being rewarded for being less well diversified,” said William Jarvis, managing director of the Commonfund Institute. “The rewards for risk taking have been muted.”
U.S. equities generated the highest average return in college investment portfolios at 20.6 percent while international stocks gained 14.6 percent, the groups said. Alternative investments returned on average 8.3 percent, with hedge funds averaging 10.5 percent and private equity 9.1 percent, they said.
The Standard & Poor’s 500 Index gained 18 percent in the year ended June 30.
The rebound in investment returns provided a needed respite for schools that are struggling with weaker tuition revenue as enrollments have stagnated or declined, the groups said. Even wealthier schools have resorted to budget cuts as they try to minimize tuition increases while keeping commitments to offer financial aid.
Universities are still recouping losses from 2009, posting an annual return over 10 years of 7.1 percent that trails an average target of 7.4 percent, according to the report.
Wealthier institutions such as Harvard University failed to distinguish themselves with superior returns. According to the report, schools with more than $1 billion in assets and those with endowments less than $25 million both had annual average returns of 11.7 percent. Over three years, the smaller schools had a 10.6 percent gain compared with 10.5 percent for the wealthier ones.
Universities stuck with their asset mixes as those with more than $1 billion invested 59 percent of their endowments on average in alternatives, which are more difficult to liquidate. Those with less than $25 million had on average 11 percent of their portfolios in assets such as private equity and hedge funds last year.
Harvard, the world’s wealthiest school with a $32.7 billion endowment, said in September it had an 11.3 percent gain in 2013, fueled by domestic and foreign stock markets. The Cambridge, Massachusetts-based university said that while private-equity investments generated a return of 11 percent in 2013, over the previous decade they failed to outperform public equities.
Yale University, the second-richest school with an endowment of $20.8 billion, posted a 12.5 percent return last year. The university, based in New Haven, Connecticut, said in September it was lowering a target for investing in private equity to 31 percent from 35 percent.
Verne Sedlacek, president and chief executive officer of Commonfund, a money manager based in Wilton, Connecticut, that oversees the Commonfund Institute, said that over the longer term wealthier universities generated superior returns by diversifying beyond publicly traded equity markets. He said in a press conference yesterday that endowment returns have been less volatile for those institutions.
The survey of 835 institutions with $448.6 billion of assets found that universities are using more money from endowments to support their missions, with an average spending rate of 4.4 percent in 2013, up from 4.2 percent the year before. Many cut distributions in the aftermath of the global credit crisis when they suffered steep investment losses in 2009.