The performance of college and university endowments in the last fiscal year, ending June 30, showed only modest gains, primarily due to underwhelming returns from private markets.
This period was notable for the dramatic rebound in public equities, especially in the first half of 2023, amidst volatility caused by inflation concerns and the Federal Reserve's interest rate hikes. The Russell 3000 and MSCI EAFE indices outperformed, with returns of 19% and 18.8%, respectively, a stark contrast to the negative returns in the previous fiscal year.
Kristin Reynolds, partner and co-head of the foundations and endowments practice at NEPC, observed a reversal in trends from the previous fiscal year. Endowments with greater exposure to public equities outperformed those leaning heavily on private markets. The lag in pricing private equity, mirroring public market trends from a year earlier, resulted in adjusted valuations and underperformance, especially for endowments heavily invested in private equity and, more so, in venture capital.
Among 37 tracked endowments with assets over $1 billion, the median return was 4.4%, lower than the 7.6% median among 65 public pension funds. The Wilshire Trust Universe Comparison Service reported a median return of 8.1% for all plans, including endowments, for the year ended June 30. Harvard University, with the largest endowment, earned a 2.9% return but experienced a slight decline in total value due to contributions to the university’s budget. N.P. Narvekar, CEO of Harvard Management Co., noted the limited gains from the endowment’s modest 11% allocation to public equities and the delayed response of private market valuations to public equity trends.
Yale University reported a 1.8% net return for its $40.7 billion endowment, with a notable decrease in venture capital assets and an increase in leveraged buyouts. However, the specific impact of these asset classes on the endowment's performance was not detailed. Margaret Chen, global head of Cambridge Associates’ endowment and foundation practice, highlighted the significant return dispersion between large and smaller endowments, attributing it to the higher exposure of larger endowments to private investments.
Among endowments exceeding $10 billion in assets, most fell below the median return, with the University of Michigan and Columbia University being notable exceptions. Stanford University’s endowment matched the median return, benefiting from strong public market performance and hedge fund outperformance.
The University of Nebraska Foundation emerged as the top performer, with a 9.8% net return. Its success was attributed to strategic manager selection and avoiding core bonds in favor of alternative short-duration opportunities. The University of Illinois Foundation’s endowment also performed well, with a 9% return, attributed to a lower risk profile and a cash-rich portfolio poised for opportunistic investments.
Looking ahead, Chen from Cambridge Associates sees a shift towards active public equities management after a decade of passive strategies outperforming. The current market environment, with selective outperformance opportunities, is driving endowments to seek high-performing active managers.
Additionally, Chen points out the balancing act between long-term investing strategies and capitalizing on short-term market opportunities. Endowments are now considering a more dynamic approach to asset allocation, balancing long-term growth assets with cash and short-term fixed income due to relatively high yields.
Nolan Bean, CIO at Fund Evaluation Group, notes an increased focus on the role of hedge funds in portfolios, especially in a high-interest-rate environment. With fixed income yields reaching 5%, endowments are reevaluating the necessity and role of hedge funds in their asset allocations, marking a significant shift in strategic investment thinking in response to the changing market landscape.
