Universities see strong growth in their endowments
Record growth in the University’s endowment for fiscal 2021 – which generated a 51.5% return and brought the overall endowment to $ 6.9 billion – reflects growth in endowment nationally . The endowment contributed $ 194 million to the University’s operating budget for fiscal year 21, which represents approximately 15% of the total operating budget. Many of the University’s peer institutions have experienced comparable endowment growth.
According to Brown’s press release, investment firm Cambridge Associates reported average returns of 35.6% and median returns of 34% achieved by other schools for FY21, The Herald previously reported. These averages place Brown among the top performers in terms of endowment growth this year. The S&P 500, a stock market index commonly used as a benchmark for the performance of US stocks, rose 40.8%. Brown’s returns of 51.5% exceeded those numbers as well as the investment bureau’s internal benchmark forecast of 43.1%.
Experts reflect on growth in endowments
Brad Gibbs ’93, MA ’18, senior lecturer in the Department of Economics, attributed Brown’s success over his counterparts to the work of the Investment Office. The growth in the endowment “is a real testament to the Investment Office in the context of difficult market conditions in recent calendar years,” he wrote in an email to the Herald. âWhile the returns for the past year have been excellent, what I find particularly impressive are the excellent relative returns generated over the past several years. “
âIn addition to benefiting from the strong recovery in equity markets following the market lows linked to the March 2020 pandemic, the team’s private equity allocations have generated exceptional returns, which is testament to both the selection managers and rising valuations (and) an environment conducive to exits, âhe added.
But Brown owes much of the growth in his endowment to broader market conditions, according to Ken Redd, senior director of research and policy analysis at the National Association of College and University Business Officers. âEndowment returns follow financial markets, and as we’ve seen, US and foreign stocksâ¦ have made huge gainsâ in FY21, he said. âA lot of endowments track indexes like the S&P 500, so when those indexes are doing well, we tend to see endowments (doing) very well as well. Financial market conditions were very strong and very positive, and endowments, like all investors, benefited. “
Typically, around half of endowment assets are in stocks and bonds, while the rest are in âalternative strategiesâ such as commodities, private equity, hedge funds or other investment classes. ‘assets. âWhen the stock market is doing well, these other assets tend to do even better,â Redd said. “What you see is that half of the endowment assets are doing even better than the traditional ones (stocks and bonds), so you see some institutions reporting numbers (which are) better than the stock market and are better than some other institutions too.
In Gibbs’ view, Brown’s returns can be attributed to a combination of his own successes and broader market trends. âWhile the market environment was certainly favorable, Brown’s outperformance against internal and external benchmarks is a testament to making good decisions,â he wrote. âIt’s also important to note that Brown’s investment professionals, in addition to focusing on returns, focus on managing risk and need to think carefully about portfolio concentration and correlation. “
Redd argued that this year’s endowment growth was primarily driven by strong market performance. âMany institutions (and) endowments have worked very well. Overall, universities, like all investors, benefit from really very strong financial markets, both on the public side and on the private or alternative side, âhe said.
Peer Schools Report Strong FY21 Figures
Harvard posted returns of 33.6%, bringing the total value of its endowment to $ 53.2 billion, according to Harvard’s financial report for FY21. Harvard’s endowment contributed more than $ 2 billion to its operating budget, of which 39%. According to the report, Harvard is targeting a payout rate of between 5 and 5.5 percent, representing the amount of the endowment that is withdrawn and directed to the operating budget. Its rate for fiscal year 21 was 5.2%.
“Fiscal year 2021 has been an extraordinary year,” wrote Narv Narvekar, CEO of Harvard Management Company, in the financial report. âBoth the public and private markets continued to perform strongly, which has enabled the endowment not only to increase its distribution at the University, but also to continue to grow during this critical period when financial pressures associated with pandemic challenge all higher education. “
MIT posted even higher profits than Brown: its yields of 55.5% took its endowment to $ 27.4 billion, according to a statement. The $ 851 million in endowment for operating the university represents about 30% of its total operating budget. In response to the growth, MIT will increase its endowment payout rate by 30% starting in fiscal 2023, the statement said.
âWe have made every effort to develop a carefully calibrated approach,â said Glen Shor, executive vice president and treasurer of MIT, of the investment strategy in the statement. âThe actions we are taking balance current needs for significant investment in the Institute, while ensuring that our endowment is preserved for future generations of learners.
Cornell’s endowment now stands at $ 10 billion after posting returns of 41.9%, according to a press release from Cornell. While the release does not offer exact figures on how much money was poured into the endowment in FY21 or what percentage of the operating budget is in installments, the annual payout rate is approximately $ 5. %. This amount is below the maximum threshold under New York state law of a 7% payout rate, as the release noted.
Cornell’s press release also cited a recent overhaul in investing and money management strategies as the reason for their significant returns. “We are starting to see the fruits of these efforts very clearly,” Cornell chief investment officer Kenneth Miranda said in the statement. âWe have a lot more flexibility, we have reduced our cost structure, controlled unfunded commitments and reorganized our portfolio of managers. The wallet is well placed.
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Yale saw an endowment growth of 40.2%, bringing its total endowment to $ 42.3 billion, according to a Press release. Yale contributed $ 1.5 billion, which was 35% of Yale’s operating budget in FY21, the statement said. An exact payout rate for FY21 has not been specified, but Yale is targeting an annual payout rate of 5.25%, the statement said.
Yale chief investment officer Matt Mendelsohn emphasized a forward-looking approach to endowment management in the press release. âIt has been an extraordinary year for the endowment, which will benefit the Yale community now and for generations to come,â he said. âWhile we are happy with this gain, we define success over longer periods of time, measured by our ability to provide stable and growing support to the university so that it can carry out its mission. “
The five institutions have comparable payment rates, but due to significantly larger endowments from Harvard, MIT, Cornell and Yale, these payments represent a larger percentage of their respective operating budgets. According to Gibbs and Redd, Brown’s significant returns stem from a combination of Brown’s well-chosen investments and the same market growth that has propelled college endowment gains across the board. âFrom the numbers I’ve seen, there are only a small handful of schools like MIT that have done better,â than Brown, Gibbs wrote.
Long-term future of Brown’s endowment
Regardless of the long-term trajectory of Brown’s endowment, the University will continue to benefit from this year’s growth, according to Gibbs. âDue to the success of the ongoing fundraising campaign and the performance of the endowment, Brown is able to invest in a wide range of strategic initiatives and ensure the institution’s ability to fulfill its mission. long term and deal with future downturns. ,” he wrote.
“In addition to supporting Brown’s annual budget and its broader strategic goals, I would expect that over time the University would consider reducing its payments in order to allow Brown to benefit from future membership.” , he added. “It is really important to understand that the endowment is not a checking account, but a savings account … capital appreciation (and preservation) will continue to pay future dividends in terms of supporting the goals of the University. ” In other words, Gibbs expects Brown to withdraw less money from the endowment each year in the future so that there is more money left to reinvest.
Redd explained that since he views this year’s remarkable endowment growth as abnormal, he doesn’t expect universities to substantially change their investment strategies in the coming years. âEndowment funds are long-term investment vehicles; they’re not designed to react to a really good year (or) a really bad year, âhe said. âWe have seen that endowments remain relatively stable even during the worst of the COVID crisis. “
During the 2008-2009 recession, universities largely did not change their investment management strategy despite losses ranging from 30 to 40%. “This year, many are up by as much … and the reaction (was to) stay the course (and) not to radically change the investment policy,” he added. âBecause endowments have more money to spend, I think you’ll see schools spending more money. The (payout) rates will likely stay relatively stable, but there is just more money to be spent on that (payout) percentage.