US university endowments post 19% return

The performance of US university endowments has continued to improve, with an average return of 19.2 per cent posted in the year to June 30, according to a new study.

The financial crisis and accompanying slide in equity markets negatively affected educational endowments, putting further stress on a sector that has been reeling from a decline in government funding. Public universities have been pushed in recent years to fill budget gaps through investments and donations as the cost of education has increased, a problem highlighted in last week’s state of the union address by President Barack Obama.

In spite of the upturn in returns from the 11.9 per cent reported for 2010, the first positive returns since 2007, educational endowments were unlikely to recover to pre-crisis levels for several years yet, said John Walda, president and chief executive of the National Association of College and University Business Officers (Nacubo), which represents more than 2,500 US higher education institutions.

Nacubo and Commonfund, which manages the endowments of 1,580 non-profit institutions, surveyed 823 US public and private colleges and universities, representing a total of $408.1bn in endowments, for the period from July 1 2010 to June 30 2011.

The wealthiest institutions, including Harvard, Yale and Princeton, with endowments larger than $1bn, performed the best in 2011, with average returns of 20.1 per cent. The smallest endowments, with under $25m, had the lowest returns, with an average 17.6 per cent.

Among the participating institutions, which had an average endowment of $495.9m, nearly half still had less than they reported in 2008. As a result, universities, particularly publicly funded institutions, are reducing the amount they spend on students.

“Around 29 states have decreased their discretionary spending for the next fiscal year and it looks to decline further in 2013. Investment per student is at a 25-year low. More and more college eligible students are looking for a seat in the classroom, but we’re having to ask, ‘How do we pay for it?’” Mr Walda said.

While one-year returns saw a marked improvement in 2011, the report’s authors expressed concern over the medium and long term outlook, which still lagged behind the level needed to cover annual spending, inflation and investment management costs. They said that average 10-year returns of between 8 and 9 per cent were needed to reach a break even point, but currently stand at just 5.6 per cent.

“Expectations of potential returns have declined significantly. Before the crisis people only ever talked about returns and now investors are diversifying where they can to eliminate risk,” said Verne Sedlacek, president and chief executive of Commonfund.

In 2011, domestic and international equities saw the greatest returns, at 30.1 per cent and 27.2 per cent respectively for the endowments, continuing a trend seen the year before. Alternative strategies, including private equity, real estate, commodities and natural resources, also saw large returns at 14.2 per cent. Commodities outperformed at 26 per cent, up from 9.5 per cent the year before.

Next year’s numbers will be watched closely as the 2011 survey closed before equity markets encountered the headwinds and high volatility which started in July 2011, caused by concerns over the European debt crisis, stubbornly high US unemployment and slow US economic growth.

Mr Sedlacek stressed the importance of donations, particularly to public institutions, at this renewed time of economic uncertainty. For private universities such as Harvard or Yale, around 40 per cent of the operating budget is made up by endowment gifts, versus a low single-digit proportion for non-elite state schools reliant on state budgets. Forty-six per cent of participants reported an increase in gifts and donations, slightly higher than the 43 per cent in 2010, while 31 per cent reported a decrease.

Among the 615 schools that reported they carry debt, average long-term total debt stood at $189m as of June 30, up from $181.5m in 2010 and $167.8m the year before. While larger institutions lowered their debt levels, smaller participants saw moderate increases.

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