Small University Endowments Outperform Larger Counterparts in Strong Stock Market

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Smaller university endowments with assets under $50 million saw impressive gains, averaging 9.8%, in the 12 months leading up to June 30, 2023, according to a recent study. Conversely, larger endowments with over $5 billion in assets struggled to achieve lackluster returns of only 2.8% on average during the same period. This discrepancy was primarily due to the underperformance of alternative investments such as private equity and venture capital, which remained stagnant or experienced modest declines.

Mark Anson, CEO of asset manager Commonfund, emphasized that those who allocated more to public equities fared better in terms of returns. This insight was gleaned from a study conducted by Commonfund in collaboration with the National Association of College and University Business Officers (Nacubo).

While endowments of all sizes experienced an average return of 7.7% in the fiscal year, they fell short of the S&P 500 index’s substantial 19.6% increase in the same period. However, this still marked a significant improvement from the previous fiscal year, during which school endowments suffered an average loss of 8%. The study analyzed 688 institutions with a combined total of $839.1 billion in assets.

Interestingly, the last nine months of the fiscal year proved to be the turning point for endowments, with both equities and fixed income securities delivering poor returns throughout the rest of the calendar year 2022.

Investing Strategies of Funds

Smaller funds tend to prioritize equities, while larger funds lean towards private equity, hedge funds, and venture capital. However, alternative strategies continue to attract funds of all sizes. According to a recent study, private equity accounted for 17% of their portfolios, hedge funds made up 15.9%, and venture capital comprised 11.9%. On the other hand, U.S. equities only represented 12.5% of their allocations. These breakdowns remained consistent compared to the previous year.

Case in point, Harvard University’s massive $50.7 billion endowment achieved a modest 2.9% gain in the fiscal year ending in June. The endowment manager attributed this lag to the performance of their alternative investments holdings.

Nevertheless, big funds should not be discounted when it comes to their ability to catch up in terms of performance. Anson, a notable expert, mentioned a “lagging effect” where it takes time for the performance of public markets to manifest in private investments. Over the past decade, large endowments have consistently achieved average annual returns of 9.1%, compared to 7.2% for all funds across various asset classes and strategies.

Unfortunately, rising expenses are eating into the gains of universities. In the fiscal year, schools withdrew $28.4 billion from their endowments—a significant 8.4% increase from the previous year. The average annual spending rate rose to 4.7% from 4.0%. Meanwhile, gifts to endowments decreased to a total of $13.3 billion from $14.9 billion in fiscal 2022.

The majority of these distributions were allocated for financial aid, with additional spending directed towards academic programs, research, endowed faculty positions, and maintaining facilities.

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