NACUBO Study Shows Average Returns Drop Six Percent in Fiscal Year 2002
For the second consecutive year, the average college and university endowment lost value amidst investment market declines and a poor economy, according to results of an annual study conducted by the National Association of College and University Business Officers (NACUBO). 654 higher education institutions participated in the 2002 NACUBO Endowment Study (NES). Those 556 participants with a June 30, 2002 fiscal year end recorded an average 6% decline in value over 12 months. Participants in the 2001 NES saw a 3.6% drop in value
in fiscal year 2001.
Endowment holdings of institutions participating in the 2002 NES total $222 billion compared with total holdings of $236 billion in 2001. Public institutions account for $61 billion or 27% of total
holdings and independent institutions account for $161 billion or 73%. Public institutions lost 6.4
percent on average compared with an average loss of 6.0% for independent institutions in FY02.
While results of the 2002 NES suggest discouraging implications for budget support at institutions,
college and university endowment investments had better returns when compared with major stock
market indexes over the same 12-month period. The S&P 500 was down 18% for the same 12-
month period and the LB Aggregate bond index was up 8.6%. Therefore, a portfolio of 70
percent equities and 30% fixed income would have had an expected loss of 10.0% using
these benchmarks. A 60/40 allocation between equities and fixed income would have had a loss of 7.4%.
Results of the 2002 NES show that the average asset class compositions of all participants are divided
among equities, 57.4%; fixed income, 26.9%; hedge funds, 5.1%; cash, 3.9%;
and real estate, 2.7%. The remaining categories—venture capital, private equity, natural
resources, and “other”—represent the remaining 4.0%.
Diversification of investments played a fundamental role in college and university endowments
realizing higher return rates than those of the major indexes. Among 2002 NES participants, a strong
positive correlation can be made between the size of an institution’s endowment and the percent of
nontraditional investments allocated in that endowment’s asset composition. The largest endowments
on average had only 67% of their investments in the traditional categories of equities (stocks),
fixed income (bonds), and cash, while the smallest endowments had 91% of their assets in those
categories. Smaller endowments were assisted by greater allocations to fixed income and cash but not
enough to offset their greater exposure to equities. The 2002 NES results substantially demonstrate that
diversification across asset classes can reduce risk exposure.
"During the 1990s, college and university endowments experienced increased return rates and reduced
investment volatility through excellent asset diversification and a soaring economy," observed
NACUBO president James E. Morley, Jr. "The asset allocations that served endowments well in the
recent past allow endowments to achieve continued investment returns above market norms. Income
from these funds remains critical to meeting the long-term needs of faculty, staff and students."
The 2002 NES data also reflect a strong correlation between endowment size and endowment
performance, with the larger endowments experiencing the best performance. Endowments over $1
billion had an average loss of 3.8% compared with losses of 6.1% for endowments of $101
to $500 million and 6.6% for endowments of less than $25 million.
Six percent of all
participants (39 institutions) account for nearly 60% of the total endowment assets reported.
The combined endowment assets of the 10 NES participants reporting the largest endowment holdings as of
fiscal year ending June 30, 2002 (identified below), represent 30% of all endowment assets reported in the
2002 NES:
1. Harvard University, $17,169,757,000
2. Yale University, $10,523,600,000
3. University of Texas System, $8,630,679,000
4. Princeton University, $8,319,600,000
5. Stanford University, $7,613,000,000 (reports as of August 31, 2002)
6. Massachusetts Institute of Technology, $5,359,423,000
7. Emory University, $4,551,873,000
8. Columbia University, $4,208,373,000
9. University of California, $4,199,067,000
10. The Texas A&M University System and Foundations, $3,743,442,000
Through managed spending policies, participants in the 2002 NES spent an average of 5.3% of
the market value of their endowments. Interest earnings from invested endowment assets provide funds
for institutional expenses including financial aid, faculty salaries, building maintenance, and other
operating costs. Endowments also provide a source of funds for colleges and universities in times of
unexpected financial need, such as the current downturn in the economy; decreases in federal, state,
and local government support for higher education institutions; and unfunded mandates resulting from
new government legislation or regulations. Certain endowment funds may be restricted to specific uses
and not available for institutional operations, student aid, and the like. Such restrictions include those
directives specified by benefactors. The vast majority of endowment funds are preserved over the long
term to sustain a strong financial base for an institution and its future.
The complete 2002 NES, available in early February 2003 on CD-ROM, contains tables, charts, and
graphs that clearly illustrate essential data on all aspects of endowment management including
endowment size, rankings, historical investment performance, asset allocation, spending policies,
management expenses, and manager selection and evaluation. The cost for the full study is $69.95 for
NACUBO members and $94.95 for nonmembers. Call 866-348-6300 for advance orders.
The NES is an annual, voluntary survey of higher education institutions that wish to report information about their endowment holdings. Survey information is collected and calculated on behalf of NACUBO by TIAA-CREF.
[The preceding article is from a NACUBO news release.]
Posted January 22, 2003 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
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