Endowments quickly slide from record-breaking returns to losses

Endowments quickly slide from record-breaking returns to losses

University endowments experienced a harsh wake-up call during the fiscal year ended June 30 after the previous year saw record-smashing returns.

However, the pain was less among institutions with more mature private investment programs and higher allocations to those associated asset classes, primarily because they limited their exposure to public markets, according to industry experts.

The larger the endowment, the more likely they would benefit since they typically allocate more to private investments.

Among the largest of all endowments, for example, Yale University and Harvard University returned 0.8% and -1.8%, respect- ively, finishing well above the median return of -4.1% among the 39 university endowments with $1 billion or more in assets whose fiscal year returns were tracked by Pensions & Investments through Nov. 4.

For the year ended June 30, the Russell 3000 index and Bloom-berg U.S. Aggregate Bond index returned -13.9% and -10.3%, respectively.

While endowments did post returns well above the public market benchmarks, the negative returns reflected a challenging public markets environment for the period that brought investment offices down to sober reality from the highs of the previous fiscal year, said Margaret Chen, global head of Cambridge Associates LLC‘s endowment and foundation practice in Boston.

Among a similar population of 40 university endowments whose returns for the fiscal year ended June 30, 2021, were tracked by P&I, the median return had been 27.3%. For the same period, the Russell 3000 index and Bloomberg U.S. Aggregate Bond index returned 44.2% and -4.6%, respectively.

Diversification was key to lessening the damage to endowment asset pools for the most recent fiscal year, Ms. Chen said.

“What was interesting about this fiscal year from an endowment and foundation perspective is that when you look at these returns, what has very much helped — which had not helped in the past 10 years — was a diversified portfolio because there was really no place to hide (from public market returns),” Ms. Chen said.

Ms. Chen noted that according to Cambridge Associates data, the average asset allocation to public equities among all endowments was 19.6% as of June 30.

Endowments with more than $3 billion in assets had an average allocation to private equity/venture capital of 28.2%, Cambridge data show.

Many endowments also benefited from the quarter-or-more lag in valuations for private investments, excluding the second quarter of 2022, which had the poorest market returns for the fiscal year, she said.

Nolan M. Bean, head of institutional investments at Fund Evaluation Group LLC, Cincinnati, echoed those sentiments.

“Depending upon how you were positioned, the folks that tended do a bit better on average had larger and more mature private programs,” Mr. Bean said. “The less exposed you were to public markets, both stocks and bonds, the better you held up.”

The differences in asset allocation created a considerable level of dispersion among the most recent fiscal-year returns among endowments with more than $1 billion in assets.

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