A Rough Midterm for College Funds

Volatility across global markets has hurt short-term returns Bloomberg with total returns for the second half of 2015 lost 3.6 percent on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends. While global markets have revived recently, endowments may struggle to make up for lost ground by the time their fiscal year ends in June.

“At this moment in time, it doesn’t look like it’s going to be a fantastic year,” says Tim Jarry, chief investment officer for the College of the Holy Cross in Worcester, Mass. The private college’s endowment saw a loss of 4 percent from July through December. Investments contribute to a school’s annual operating budget, though schools determine spending based on average returns over a few years. Investments used for diversification were mainly a drag. The $3.1 billion University of Washington fund, down 3.8 percent, was hurt by emerging markets. The University of Iowa, with $1.3 billion, lost 4.6 percent, thanks in part to global bonds and real assets, including natural resources. Hedge funds, which can bet on a variety of securities either rising or falling in value, contributed to the University of California’s 2.5 percent loss on its $8.7 billion portfolio.

Endowments have expanded the range of their investments to include not only commodities and hedge funds but also venture capital and private equity, or buyout, funds. This is the Yale model, named for that school’s legendary $26.5 billion fund, which has earned a 10 percent annualized return over the past decade. (Yale hasn’t reported returns for the latest six-month period.)

Despite this shift, there remains a persistent long-term performance gap between large endowments such as Yale’s and smaller ones. Schools with funds of at least $1 billion have earned 7.2 percent annually over the past decade, compared with an average of 6.2 percent for those from $101 million to $500 million. “A one-point difference over 10 years is pretty substantial,” says Ken Redd, director of research

By endowment size 7.2% 6.7% 6.2% 5.9% 5.6% 6.0%

More than $1b $1b to $501m $500m to $101m $100m to $51m $50m to $25m Less than $25m