Transcript A-133 and Sub-Recipient Monitoring

Endowed Funds Performance
and Spending Criteria
Steve Birkhofer
Endowed Funds Performance & Spending Criteria
• Snapshot from 2012 NACUBO study:
– Eight hundred thirty-one U.S. educational institutions
participated in the fourth annual NACUBO-Commonfund Study
of Endowments® (NCSE), for the 2012 fiscal year .
– Institutions in the NCSE top decile reported an average oneyear FY2012 return (net of fees) of 4.9 percent, a marked
decline from last year’s 25.0 percent. By comparison, the
entire Study population reported an average one-year return
of -.3%. When viewed by type, the participating private
institutions accounted for 63 percent of the Study universe and
nearly 70 percent of institutions’ total endowment assets.
– Against a backdrop of mixed economic news on the domestic
front and challenges confronting major economies around the
world, educational endowments avoided major gains and loss’
during 2012.
– Assuming an average 4.5 percent policy spending rate, a
notional estimate of 2–3 percent inflation and 1 percent
expenses, institutions will need long-term returns of around 8
percent per year, on average, just to stay even.
Endowed Funds Performance & Spending Criteria
• Returns & Investment Objectives:
• Two investment themes dominated in FY2012. The first was that,
with the exception of the large-cap U.S. stocks represented in the
S&P 500 Index, equity markets globally had poor or negative
returns. The second was that, partly because of the quantitative
easing policies carried out by central banks as they sought to
stimulate economic growth, active managers struggled to
outperform in the face of market volatility and directional shifts.
The highest returns for FY2012 came from bonds.
• US Equities outperformed most developing and emerging market
issues (including China) due to a combination of woes in Europe,
a softening economy in China, et al. These issues were coupled
with an investor flight to safety (i.e. the USA, in spite of its many
problems). Other positive results from the U.S.: strengthening
corporate earnings, a trend toward ‘reshoring’ of production and
support related activities, and jobs.
Endowed Funds Performance & Spending Criteria
• PERFORMANCE & RETURNS
– The 831 endowments participating in the 2012 NCSE reported
an average return of -0.3 percent (all current year and longerterm returns are reported net of fees), 1950 basis points behind
last year’s 19.2 percent return. In the two previous Studies,
participants reported an average return of 11.9 percent for
FY2010 and -18.7 percent for FY2009. In the FY2011 Study,
returns were positive for all asset classes and sub-asset
classes, and double-digit gains were common. While most
asset classes showed positive returns this year, there were
some losses; and gains, in general, were much more muted.
•
ANALYSIS OF RETURNS
• Three-, five- and 10-year returns were positive, both for Study
participants as a whole and for each of the six size cohorts. The
average annual three-year return for all institutions was 10.2
percent, a significant increase over last year’s 3.1 percent. Most
of the improvement can be attributed to the dropping of
FY2009’s -18.7 percent return from the computation of the
trailing three year average.
Endowed Funds Performance & Spending Criteria
Figure 2.2
Average One-, Three-, Five- and 10-Year Net Returns for Fiscal Years 2011 and 2012
numbers in percent (%)
$501 Million $101 Mil
$51–
$25 –
Total InstitutionsOver $1 Billion – $1 Billion $500 Million $100 Million $50 Million
Under $25 Mil
Category Total Institutions:
Fiscal Year 2011 vs 2012
823
831
73
68
66
71
251 250
162 164
134 128
137
150
‘11
‘12
‘11
‘12
‘11
‘12
‘11
‘11
‘12
‘11
‘11
‘12
Annual total net return
19.2
-0.3
20.1
0.8
18.8 0.4
19.7 -0.7
19.3
-1
19.4 -0.5
17.6
0.3
3-year net return
5-year net return
10-year net return
3.1
4.7
5.6
10.2
1.1
6.2
2.4
5.4
6.9
10.6
1.7
7.6
2.6 10.3
4.8 1.2
6 6.6
2.6 10.2
4.4 0.7
5.3 6
2.8
4.4
5.1
9.7
1
5.7
4.2
4.7
5
4.6
5.2
4.9
10.4
1.5
5.7
‘12
Avg Annl Total Net Return for NACUBO Survey Schools
20%
10%
0%
Year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-10%
-20%
Annual
Linear (Annual)
‘12
10.1
1
5.8
Endowed Funds Performance & Spending Criteria
• Public-only institutions produced the highest annual return,
0.3 percent. Returns for all other cohorts were slightly
negative; -0.4 percent among private institutions and IRFs
and -0.7 percent among combined endowments/foundations
• For 2012, the highest asset class return came from fixed
income, a gain of 6.8 percent. The lowest return, -11.8
percent, came from international equities, a sharp reversal
from last year’s 27.2 percent advance. Domestic equities, last
year’s highest performer with a 30.1 percent return,
generated a return of just 2.0 percent this year. Alternative
strategies returned 0.5 percent versus 14.1 percent in
FY2011, and short-term securities/cash/other returned 0.2
percent compared with last year’s 4.2 percent.
• Long-term investment objectives for endowed funds were
expressed by 66% of survey respondents. The average
target is an annual return of 7.4 percent while the median
return target is 8.0 percent. Highest average return target, 7.9
percent, was reported by institutions with assets between
$501 mil and $1 billion, while the lowest, 6.9 percent, was
reported by institutions with assets under $25 mil.
Endowed Funds Performance & Spending Criteria
• Many institutions tie their long-term return objectives to the
Consumer Price Index (CPI) or the Higher Education Price
Index (HEPI). A typical response is CPI or HEPI plus an
incremental percentage return, usually in the range of 4–5
percent.
• UNC Asheville shadows investment manager ‘UNC
Management’s’ long term real rate of return target of 5.5%
(i.e. net of fees, above inflation, et al).
• Investment principles espoused by NACUBO for institutions
of all size for stronger long-term returns:
– Portfolio should have have an equity bias.
– Recognize the ‘time value of money.’ Longer-term capital
commitment enhances rate of return.
– Greater diversification reduces risk (e.g. inflation), and adds
efficiency.
Endowed Funds Performance & Spending Criteria
• Uniform Prudent Management of Institutional Funds Act
(UPMIFA)
– UPMIFA applies to funds held for charitable purposes by
nonprofit, charitable institutions.
– The three principal issues addressed are scope of coverage,
investment obligations and expenditure of funds.
– Appropriation for Expenditure of Funds:
• Subject to the intent of a donor expressed in the gift instrument
[and to subsection (d)], an institution may appropriate for
expenditure or accumulate so much of an endowment fund as the
institution determines is prudent for the uses, benefits, purposes,
and duration for which the endowment fund is established. Unless
stated otherwise in the gift instrument, the assets in an
endowment fund are donor-restricted assets until appropriated for
expenditure by the institution.
– Other Factors to consider:
• 1. Duration & preservation of the endowment fund.
• 2. Economic climate. 3. The investment policy of the institution.
• Has helped to lessen scale of underwater funds in downturn.
Endowed Funds Performance & Spending Criteria
Avg Annl Effective Spending Rates for NACUBO Survey Schools
6.0%
5.5%
5.0%
4.5%
4.0%
Year
2000
2001
2002
2003
2004
2005
2006
Annual
2007
2008
2009
2010
2011
2012
Linear (Annual)
Average Annual Effective Spending Rates & Changes for Fiscal Years 2011 and 2012
numbers in percent (%)
Total Institutions
Over $1 Billion
$501 Million
$101 Mil
$51–
$25 –
– $1 Billion
$500 Million
$100 Million
$50 Million
Under $25 Mil
# Schools in Analysis
823
831
73
68
66
71
251
250
162
164
134
128
137
150
2011 vs 2012 Results
‘11
‘12
‘11
‘12
‘11
‘12
‘11
‘12
‘11
‘12
‘11
‘12
‘11
‘12
Effective Spend Rate %
4.6
4.2
5.2
4.7
5.2
4.7
5
4.3
4.5
4.3
4
3.8
3.7
3.7
Spend %age of Moving Avg
75
75
56
70
73
83
83
73
Decide Spend Rate
11
11
10
4
11
11
13
13
Increased Spending $'s
51
57
47
73
62
61
51
56
47
56
56
50
50
54
Increased Spending Rate
25
19
15
12
12
10
25
17
26
24
31
23
31
21
Each Year
Endowed Funds Performance & Spending Criteria
• 2012’s average rate spending declined to 4.2% from 4.6% in
2011.
• The decline in the effective spending rate is largely a result of
previous years’ asset value increases, but $ spending
continued to rise. This extends from portfolio moving
averages’ declining more slowly than the asset values
coupled with reluctance to cut spending commensurate with
portfolio losses. Conversely, when returns rose in FY2011
and FY2010, the effective spending rate declined.
• Comments from a number of smaller institutions reveal
caution regarding economic conditions and the budgetary
realities imposed by lackluster investment returns, which
caused many institutions to make special appropriations to
support their operating budgets. Gift flows, in the meanwhile,
remained finely balanced, with almost as many institutions
seeing a decrease in gifts as experiencing an increase.
Endowed Funds Performance & Spending Criteria
• 83 percent of NACUBO survey schools with assets between
$51 and $100 million and between $25 and $50 million
reported using the moving average formula, leading all other
cohorts. The lowest incidence of use of this method was 56
percent of institutions with assets over $1 billion; this was up
from 53 percent in 2011.
• Costs: Items that educational endowments include in their
costs, the vast majority—89 percent—include asset
management fees and mutual fund expenses. After that, most
count consulting fees/outsourcing, at 63 percent and Fifty-seven
percent include direct expenses.
• Note: UNC Asheville uses a 3 year moving average. In 2012
the spending rate was 5%, and effective spending rate was
4.2% (exclusive of management fees) ; rate coincides with
2012 survey national average. Pooled endowed resources
totaled approximately $28 mil.
Endowed Funds Performance & Spending Criteria
• Underwater Funds:
– In the FY2009 Study, participants reported that 22.4 percent of
the value of their endowment was in funds that were below their
dollar value at the time of donation, or “under water.” The two
subsequent years of strong endowment returns substantially
lowered the proportion of assets that are under water. By 2011,
that had fallen to 4.9 percent of assets. This year’s flat returns
saw an increase in this rate, as it rose to 7.1 percent of assets
on average. All six size cohorts reported having a higher share
of assets under water in FY2012. In FY2011 & 2012, the
smallest participating endowments had the lowest proportion of
assets under water (6% in 2012 & 3.8% in 2011).
– For UNCA, a small cohort school with approximately $28 mil
pooled, 2.5% of UNCA’s were marginally ‘underwater’ for FY
2012.
Endowed Funds Performance & Spending Criteria
• Investment Behavior & Current Trend(s):
– From the New York Times (Oct 12, 2012): Endowment
envy appears to have fueled the broad transition to the
‘Ivy League’ model. However, hedge funds have
underperformed a simple 60/40 stock/bond mix every year
for the past 10 years.
– “Today, it’s hard to find a college or university that stuck
with the older and far simpler allocation between stocks
and bonds.” (Note the traditional 60/40 or 70/30 equities to
fixed income split). Using the ‘Ivy League’ model, which
includes heavy dependence on ‘alternative investments,’
Harvard Univ has generated 12.5% annual returns in the
past 20 years. For 2012, Harvard reported a -.05% return
while the S&P 500 index returned 5.5%.
– Access to the top tier investment fund managers likely to
remain restricted to largest endowments. Others using
alternative methods likely to achieve mediocre results.