NACUBO-TIAA: Endowments face pandemic-era muted returns

While endowment spending is on the rise, the returns at major U.S. university portfolios are down significantly from historical norms, according to the 2020 NACUBO-TIAA Study of Endowments that was released this week. Endowments’ average one-year returns were 1.8% for the year ending June 30, 2020, compared with 5.3% for the fiscal year 2019. Both years were lower than historical target returns of 7.5%, while on an five-year annualized returns total just 5.1%. The long-term investment experience of endowments could soon motivate at least some institutions to reconsider their core investment strategies, officials said. “The one-year performance figure reflects the reality that few market sectors were immune to the steep downturn in early 2020 and most markets had not fully recovered by the time the fiscal year ended on June 30,” said Doug Chittenden, executive vice president and head of institutional relationships at TIAA. “Investment markets rebounded strongly in 2020’s latter half, so the FY20 investment return figure likely understates the performance achieved by most funds in calendar year 2020.” Going forward, Chittenden said, that if returns continue to fall short, endowments will need to consider all their possible levers for meeting their targeted return rate. Portfolio construction changes may be underway. With continued low interest rates many investors have been pushing farther out on the risk curve. Across the 705 endowments surveyed by NACUBO with total assets of $637.7 billion, the average portfolio allocations to equities were 33%, while alternatives make up more than half of the average portfolio with private equity/venture capital totaling 23%, marketable alternatives, 20% and real assets, 11%. Officials said that smaller endowments that had greater exposure to fixed-income, particularly in investment-grade securities, saw greater investment gains over the 12-month time frame ending June 30, 2020. Meanwhile larger endowments had larger allocations to alternatives that offer diversification from public equities and fixed income, but smaller endowments are often not able to access alternatives due to investment minimums and other factors. “Institutions will need to be especially thoughtful about their endowment’s strategic and tactical positioning as pandemic impacts continue playing out, amid an uneven global economic recovery and persistent low-rate environment,” commented Dimitri Stathopoulos, senior managing director at Nuveen, which owns TIAA.

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