Monday, February 9, 2015

A Snapshot of University and College Endowments

How much money do colleges and universities have in their endowments? How are they investing the money? What returns are they earning? The National Association of College and University Business Officers does a survey of these questions each year, and ome results from its 2014 survey are now available.

What colleges and universities have the largest endowments? Here's a list of the top 40, with Harvard leading the way at $35 billion.  The numbers are large for many of these nonprofit institutions. One caveat: The numbers are not adjusted for the number of students at each of these institutions. For example, #1 Harvard has a total enrollment of a little more than 20,000 students, while the University of Texas system enrolls more than 200,000.

How concentrated are the endowment assets? Of the 832 total isntitutions, the top 10.9% with endowments of more than $1 billion each hold 74% of all endowment assets. Public institutions hold about one-third of endowment assets.

How do colleges and universities invest their endowment funds? It varies considerably according to the size of the endowment. The institutions with the biggest endowments put well over half of their funds into "alternative strategies," which according to the report is defined as "Private equity (LBOs, mezzanine, M&A funds, and international private equity); Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, and event-driven and derivatives); Venture capital; Private equity real estate (non-campus); Energy and natural resources (oil, gas, timber, commodities and managed futures); and Distressed debt." Institutions with smaller endowments put a much larger share into "domestic equities" in particular. Interestingly, the dividing line here really is by size of endowment: public and private institutions allocate their endowments in very similar ways. 

 Finally, how did those investments perform in 2014? As one might expect, returns for domestic equities, fixed income, and international equities are all quite similar across endowments of different sizes. But the big endowments over $1 billion get a substantially higher return on the "alternative strategies" than do smaller endowments--which of course explains why they have a large share of assets in this category. In particiular, the large endowments get much better returns in the "alternative" categories of private equity and ventur capital. One suspect that there is some combinatino here of better-paid investment professionals at these schools who are networked into better quality opportunities in private equity and venture capital than are available to schools with smaller endowments.

Table 1: Average Return by Asset Class for Fiscal Year 2014