College Endowments Opt for Alternative, and Less Lucrative, Route
Last year, alternative investments accounted for an average of 52 percent of endowment assets — over 60 percent in the largest
endowments — the same percentage as two years ago, according to the annual Nacubo-Commonfund study of endowments.
There’s still this belief that alternatives will provide some measure of outperformance.”
He noted that endowments of more than $1 billion, which tend to have high allocations to alternatives,
did on average outperform the 60-40 mix (but not the 70-30 mix) over the most recent five-year period.
Yet over the last 10 years, the average endowment earned a 4.6 percent annualized return, lower than the
5.3 percent return for a low-cost 60-40 stock-bond index fund portfolio and 5.4 percent for a 70-30 mix.
As a group, they, too, have underperformed simple index strategies over 10 years, and their huge portfolios of alternative assets “appeared to deliver no meaningful benefits in 2017,” according to a study by Markov Processes International, a quantitative research firm
that did an in-depth study of the performance of Ivy League endowments.
That’s a tall order.”
Given the need to cover increased costs, not to mention the recent tax legislation
that seeks to tax the wealthiest endowments, asset managers at colleges are under increasing pressure to generate higher returns, even as lofty stock valuations and rising interest rates “suggest it will be hard to get 7.5 percent with a traditional asset mix going forward,” Mr. Philips said.
It’s official: Returns for college and university endowments for the 2017 fiscal year are in,
and while they averaged a respectable 12.2 percent for the year, over the last decade they have underperformed funds offering a simple 60-40 or 70-30 stock-fixed income allocation.
