College Endowment Earnings Rose by Nearly 10% in 2005

By Harvy Lipman

Investments by the endowments at American colleges and universities earned substantially more than the stock market last year, according to a new report.

The average investment return at the endowments was 9.7 percent in 2005, according to a study released by the Commonfund Institute, in Windsor, Conn. That is down from the 14.7 percent average increase colleges achieved in 2004, but still the second best performance in the past five years.

Last year's returns, however, greatly exceeded those of the major stock indexes for 2005. The Dow Jones index was unchanged from July 1, 2004 through June 30, 2005 (80 percent of the 729 schools in the survey have fiscal years ending June 30). Over the same period the Nasdaq index rose just 2.5 percent.

John S. Griswold, executive director of the Commonfund Institute, said the endowments' good performance was largely due to the increasing number of colleges that hired of professional investment managers, who 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 the many institutions have also increasingly established investment committees, often made up of financial experts recruited from their alumni or parents of current students. "This increasing level of sophistication is generating some of these higher returns," Mr. Griswold said.

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, the institute found. Holdings of domestic stocks dropped from 31 percent of the endowments' portfolios to 28 percent, according to the study.

The change was even more significant among the best-performing endowments: 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.

Colleges and universities also spent a decreasing share of their endowments for the fourth consecutive year. The average spending rate fell from 4.8 percent to 4.6 percent. In 2002, colleges spent an average of 5.1 percent of their endowments.

The colleges and universities in the survey reported that they expect lower returns both next year and over the next three years. The average expected return for the 2006 fiscal year is 8 percent, while the average expectation for the next three years is 8.3 percent.

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.

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.