January 26, 2006 | Read Time: 3 minutes
Investments by the endowments at American colleges and universities earned substantially more than the stock market last year, according to two new reports.
Surveys by the Commonfund Institute, in Windsor, Conn., and the National Association of College and University Business Officers, in Washington, both found that the average return on endowments was nearly 10 percent in 2005 — 9.7 percent in the Commonfund report and 9.3 percent in the business officers’ study.
Both figures are decreases from 2004, when Commonfund reported a 14.7-percent average return and the business-officers association found average earnings to be 15.1 percent.
Even so, colleges still reaped their second-best return in the past five years. What’s more, last year’s returns greatly exceeded those of the major stock indexes for 2005. The Dow Jones index was unchanged from July 1, 2004, through June 30, 2005, the period covered by most of the institutions in the reports. Over the same time, the Nasdaq index rose just 2.5 percent.
Colleges are not as optimistic about their earning potential in the coming years. Colleges expect a return of 8 percent on their investments in 2006, while the average expected for the next three years is 8.3 percent.
John S. Griswold, executive director of the Commonfund Institute, said the endowments’ good performance was largely due to the professional investment managers hired by an increasing number of colleges. They have diversified the institutions’ holdings into a wide range of alternatives.
“What we’re seeing is an increasing level of sophistication,” Mr. Griswold said. “They’ve hired more chief investment officers, who are professional investment managers. Before, especially among the medium and small endowments, there was no such position. What they had were business officers who were experienced in accounting practices, but not professional investment experts.”
He added that many institutions have also increasingly established investment committees, often made up of financial experts recruited from alumni or parents of current students. “This increasing level of sophistication is generating some of these higher returns,” Mr. Griswold said.
Alternatives to Stocks
During 2005, endowments shifted more of their investments out of corporate stocks and into such alternatives as venture capital, leveraged buyouts, natural resources, and real estate, Commonfund found.
Holdings of domestic stocks dropped from 31 percent of the endowments’ portfolios to 28 percent, according to its study.
The change was even more significant among the best-performing endowments: Commonfund reported that the top 10 percent cut their holdings in American stocks from 27 percent of all investments to 20 percent, while increasing their allocation to venture capital and other alternative investments from 36 percent to 44 percent.
The study by the business-officers association found a similar trend toward alternative investments. It reported that investments in hedge funds, private equity (such as leveraged buyouts), venture capital, natural resources, and real estate rose from 12.8 percent of all holdings in 2004 to 15.1 percent last year.
Colleges and universities also spent a decreasing share of their endowments for the fourth consecutive year.
The average share of the endowment spent fell from 4.8 percent to 4.6 percent, according to the Commonfund report. In 2002, colleges spent an average of 5.1 percent of their endowments. The business-officers group reported average spending of 4.7 percent in 2005, down from 5 percent in 2004.
Private donations increased at 48 percent of the institutions, while 26 percent saw a decrease. The amount of endowment growth attributable to gifts in 2005 averaged 5.4 percent, down from 5.5 percent in 2004.
The Commonfund Institute is the research arm of Commonfund, a company in Wilton, Conn., that manages approximately $29-billion in assets for more than 1,600 nonprofit organizations.
The National Association of College and University Business Officers represents chief administrative and financial officers at more than 2,500 colleges, universities, and higher-education service providers.
Nonprofit organizations can obtain free copies of the “2006 Commonfund Benchmarks Study” by sending an e-mail message to the institute’s executive director, John S. Griswold Jr., at jgriswol@cfund.org. Commonfund charges $250 per copy for other organizations and individuals not affiliated with a nonprofit group.
The “2005 National Association of College and University Business Officers Endowment Study” will be available on CD-ROM in mid-February, at a cost of $74.95 for association members and $199.95 for nonmembers. To place an order, call the association at (866) 348-6300.
