College endowments show losses in volatile stock market

It’s shaping up to be a difficult time for U.S. college endowments.

A dozen funds that responded to requests from Bloomberg for their returns for the first six months of fiscal 2016 showed an average loss of 3.8 percent. 

Indiana University’s $2.3 billion endowment had the biggest loss among them at 6.1 percent through Dec. 31.  Pennsylvania State University’s $3.7 billion fund had the smallest decline at 1.8 percent. The Standard & Poor’s 500 Index lost 1.6 percent in that time.

The interim results from schools, nearly all with assets of at least $1 billion, provide a snapshot of performance at endowments, which are typically heavily invested in equities, hedge funds and private equity. While global equities have rallied recently, endowments may be unable to make up for lost ground when the fiscal year ends June 30. Investment returns contribute to a school’s annual operating budget.

Spending angle

“At this moment in time, it doesn’t look like it’s going to be a fantastic year,” said Tim Jarry, chief investment officer at the Worcester, Massachusetts-based College of the Holy Cross, whose $721 million fund was down about 4 percent as of Dec. 31. “From the spending angle, it’s an important number because people are basing what they spend off those June 30 markers.”

Universities publish investment performance annually. While public schools often report quarterly or twice a year to their governing boards, private schools usually don’t make those figures public.

Purdue University, University of Oklahoma and Indiana declined to comment on performance. The University of Illinois and University of Florida didn’t immediately respond to a request for comment.

Harvard University, Princeton University and Yale University, which are among the largest U.S. endowments, declined to report performance through Dec. 31.

All fund sizes are as of June 30. The six-month performance returns are preliminary because of a lag in pricing illiquid investments such as private equity.

Challenging environment

The six-month losses come after lackluster 2.4 percent returns on average for fiscal 2015, the worst since a 0.3 percent decline three years prior, according to the National Association of College and University Business Officers and investment manager Commonfund. While endowments invest for the long term, the schools set a formula—often an average of the previous three or five years of returns—for annual spending rates to fund academic operations.

Schools typically spend about 4 percent to 5 percent, which means they need annual returns to be higher to avoid cutting into principal. The chief investment officers of some of the wealthiest endowments, including those at Harvard and the University of Notre Dame, said last week at an investing conference that the current environment will be challenging for returns.

For decades, endowments typically followed a portfolio model in which the majority of assets were invested in equities. Asset allocations, which still include stocks, have expanded to include hedge funds, private equity, emerging markets and commodities, making the funds more susceptible to swings in the price of oil or the pace of China’s economic recovery.

“People were expecting a low-return environment for a long time,” Holy Cross’s Jarry said. “A lot can happen in a couple of months. Already we’ve seen March has gotten off to a pretty good start. It’s hard to say.”

Indiana’s endowment had 24 percent of its assets in domestic equities and 12 percent in international equities, according to a university report. The endowment posted a gain of 3.5 percent in fiscal 2015.

The University of Washington said its endowment declined 3.8 percent, with losses led by its emerging market holdings. The $3.1 billion fund returned 6.8 percent in fiscal 2015.

“This is why we use rolling averages,” to determine payout percentages for school operations, said Norman Arkans, a school spokesman.

Emerging market equity holdings also contributed to a 2.5 percent decline at University of California’s $8.8 billion endowment.

China’s market

“China’s stock market crash, the meltdown in commodities, the emerging market equity selloff, a Fed rate increase and the rising U.S. dollar vis‐a‐vis most currencies, made the past six months memorable,” according to a school report.

Penn State’s $3.7 billion fund lost 1.8 percent for the six months. Non-U.S. stocks represent about 20 percent of the portfolio and posted declines in line with its benchmark index, said Lisa Powers, a university spokeswoman.

International equities and inflation hedging strategies declined the most in the period for the University of Kentucky, said Susan Krauss, the treasurer. The school, with a $1.2 billion fund, had a 3.6 percent decline.

“We have a diversified portfolio, and we’re not overly concerned at this point,” Krauss said in an interview. “We’re not going to to make any changes at this moment.”

Ohio State University’s $3.6 billion endowment was down 3.1 percent in the six months, led by a 5.5 decline in its global equities holdings, which accounted for 61 percent of assets, according to the school.

Downside risk

“The performance of our long-term investment pool over the past six months was largely affected by a downturn in the global equities market for the first quarter of our fiscal year,” John Lane, Ohio State’s chief investment officer, said in an email. “The second quarter showed improvement, and we remain confident in our strategy over a longer period of time to produce stable returns that guard against downside risk.”

The school, whose endowment returned 3.8 percent last year, bases its payout on a seven-year average, meaning “short-term swings have little impact on what is available for teaching, learning and research at Ohio State,” Lane said.

Some endowments look at falling prices as a buying opportunity, said Jim Bethea, chief investment officer of the University of Iowa’s $1.3 billion fund, which declined 4.6 percent in the six months. Its target allocation was 40 percent in global equities, and the results were dragged down by real assets, which include natural resources, and global fixed income, according to a school report.

“As long as your endowment is liquid, you should be able to buy things that are attractively priced,” Bethea said in an interview.