Endowment Returns Fail to Keep Pace with College Spending

U.S. university endowments are losing ground as returns on investment fail to keep pace with school spending needs, according to Commonfund and the National Association of College and University Business Officers.

Endowments lost on average 0.3 percent in the year ended June 30 after gaining 19.2 percent a year earlier, driven by an 11.8 percent slide in international equities, the groups said in a report released today. More than a third of the schools also reported receiving less in donations than a year earlier.

Most endowments, which are still recovering from 2009 losses in the wake of the global credit crisis, shrank in size after accounting for new contributions and transfers to help pay for university operations, according to the annual study. Harvard University, the world’s wealthiest school, reported a 4.1 percent drop in its endowment value to $30.4 billion, while Yale University’s fell less than 1 percent to $19.3 billion, according to the survey.

“Universities are not back to where they need to be,” Verne Sedlacek, president and chief executive officer of Commonfund in Wilton, Connecticut, said at a news conference. “The challenges are significant.”

International equity markets performed poorly in the year ended June 30, reflecting the financial turmoil in Europe, fears of a hard landing in China as economic growth slowed there and weak returns from many emerging countries, according to the report. On average, endowments allocated 16 percent of their portfolios to international equities.

Nacubo and Commonfund gathered data from 831 U.S. colleges and universities managing $406.1 billion of assets.

Private Equity

The survey found that universities on average increased their positions in private equity while cutting investments in hedge funds, which generated a loss of 1.2 percent last year. The average allocation to all alternative assets increased to 54 percent from 53 percent last year, according to the report.

Yale said in a report last month that it may boost its hedge fund holdings to 18 percent of its portfolio in the coming year after cutting them to 14.5 percent last year. Yale, based in New Haven, Connecticut, posted a 4.7 percent return on its investment in fiscal 2012.

Harvard, based in Cambridge, Massachusetts, has said it is seeking to increase its direct investments in international natural resources such as tree plantations. Harvard lost 0.05 percent on its investments in the year ended in June, compared with a 21 percent gain in fiscal 2011.

Insufficient Returns

Universities are failing to generate returns sufficient to cover inflation, fees and the transfers from their endowments to pay for operating costs, according to Sedlacek, whose company manages $25 billion in investments, mostly for nonprofit organizations.

The report also found that decreasing donations are a cause for concern, with 39 percent of institutions saying they received less in gifts in fiscal 2012 compared with the previous year.

The annual average return for endowments over 10 years was 6.2 percent, according to the report. The goal for most of the institutions is 7.4 percent, Sedlacek said.

In 2009, colleges and universities lost on average about 19 percent on their investments after global credit markets collapsed. Harvard had a 27 percent loss that year, the worst performance among the eight schools that make up the Ivy League in the U.S. northeast.

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