Size Isn't Everything for Comparing Endowment Gains, Study Shows

  • Tuition discounts, enrollment, donations should be factors
  • One-size approach doesn’t work, TIAA Institute says in report

Colleges need to consider yardsticks other than size when comparing their endowment performance, according to a new study.

Endowments should factor in tuition discounts, enrollment, the size of endowment per student, budget contributions and donations, according to a report by TIAA Institute. Those measures may be more effective in determining appropriate asset allocation and portfolio risk than relying mainly on peer size.

“A one-size-fits-all approach does not work,” Cristian Tiu, a finance professor at the University of Buffalo, wrote in the report. “Instead, good organic benchmarks should be university-specific.”

More Risk

While a small liberal arts college and a large public university can have endowments of similar size, they may have different goals for their portfolios, Tiu wrote. Larger endowments may owe their higher returns partly to taking more risk, he wrote, particularly with alternatives such as hedge funds. TIAA Institute, a division of financial services provider TIAA, published the report this month.

“What larger endowments are doing is not necessarily what you should be doing, even if you’re almost the same size,” he said in an interview.

In fiscal 2016, university endowments of all sizes suffered their worst year since 2009, losing an average of 1.9 percent, according to National Association of College and University Business Officers and money manager Commonfund. Only two of eight Ivy League schools, Yale University and Princeton University, posted gains in the year through June 30. Unhappy with mediocre results and high fees, some pensions and endowments are slashing their allocations to hedge funds.

Tiu said he began researching benchmarks and asset allocations in 2009, when the University of Buffalo’s endowment became fully managed by its foundation rather dividing the duties with the trustees of the State University of New York system, of which Buffalo is a member. After assets under management doubled because of the change, the foundation reviewed its asset allocation and looked at peers with similarly sized funds.

In 2010, the year after Buffalo’s endowment became managed fully in-house, hedge funds and funds of funds made up 3.9 percent of the foundation’s assets. As of June 30, 2016, the foundation’s second-largest allocation was to hedge funds, which made up 19.8 percent of its portfolio, according to Edward Schneider, executive director of the foundation.

“This made me wonder why size benchmarks are so important,” Tiu, who is a member of the endowment’s investment committee, said about the change in asset allocation. “There is no fundamental reason why they should be.”

The endowment portion managed by the foundation, had an investment loss of 0.4 percent in the year through June 30. Endowment assets were $600 million.

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