With strong financial markets in 2017 and market volatility surfacing in early 2018, it is timely to delve deeper into the performance and allocation trends of larger versus smaller endowments and foundations (E&Fs), as segmented by their total asset size.
This paper examines 85 E&Fs using aggregate data from BNY Mellon’s Asset Strategy View® solution to observe performance and asset allocation trends through year-end 2017.
To provide broader context for this analysis, for the larger universe of 116 E&Fs tracked by BNY Mellon, the 10-year average return ending December 31, 2017, was 5.35%.1 With this long-term return average in mind, it is important to note that with spending rates net of investment and administration fees averaging just around 4.4% per year for endowments and 5.4% and 4.8% per year respectively for private and community foundations, long-term returns are potentially insufficient to maintain the principal assets of E&Fs after spending, inflation and costs.2,3
Clearly, E&Fs face ongoing challenges including performance, risk mitigation and fundamental choices about whether to choose an in-house versus outsourcing investment management model versus a hybrid approach. In 2017, Harvard, the world’s largest endowment, began to shift away from its hybrid model by dramatically scaling back its 230-person in-house investment staff and making other changes to reduce organizational complexity and outsource more of its investment portfolios.4 E&Fs of all sizes are likely grappling with similar questions about the how to best deploy their resources to achieve their investment objectives. Are there opportunities for larger and smaller institutions to share information about how to optimize their investment process and supporting operating models? What best practices can be shared about investment tools, resourcing, governance and other areas among E&Fs?
E&Fs head into 2018 with some new challenges as a result of the recent tax overhaul passed in late 2017. Under the U.S. Tax Cuts and Jobs Act (TCJA), wealthy endowments face the new challenge of the 1.4% tax on their investment earnings. While the new tax only applies to private colleges and endowments with net assets of $500,000 or more per student — only about 30 such institutions are immediately affected — that number is expected to grow in the next few years as endowment values grow.5 It remains to be seen how charitable and alumni giving will be affected by TCJA’s increased standard deduction for individuals. With tax breaks allowable only for those who itemize—and fewer families expected to itemize their deductions—it is possible that some non-profit organizations might see a decline in donor funding with potential impacts on asset allocation.
E&Fs face myriad market and regulatory challenges in 2018, notably, the early months of 2018 showing increased volatility, tax reform impacts, and anticipated increases in interest rates. With these dynamics in mind, BNY Mellon will continue to monitor and report on material trends in asset performance and asset allocations for E&Fs.
1 The 10-year return cited here is based on BNY Mellon’s universe of 116 endowments and foundations, which consists of BNY Mellon client data and external sources. This data set was used to show longer term trends since Asset Strategy View®, the solution leveraged for most of this study, does not extend 10 years in history.
2 NACUBO-Commonfund Study of Endowments (2017) page 7. National Association of College and University Business Officers and Commonfund Institute.
3 2016 Council on Foundations-Commonfund Study of Investment of Endowment for Private and Community Foundations® Press release July 14, 2017; Retrieved from: https://www.commonfund.org/wp-content/uploads/2017/07/CCSF-2016-Press-Release-FINAL.pdf
4 McDonald, M. Bloomberg.com “Harvard’s New Fund Manager, Copying Yale, Will Farm Out Money,” January 25, 2017 Retrieved from: https://www.bloomberg.com/news/articles/2017-01-25/harvard-says-endowment-will-outsource-most-management-cut-jobs
5 Seltzer, R. Inside Higher Ed. (2018, January 5) Estimating the Endowment Tax’s Future. Retrieved from https://www.insidehighered.com/news/2018/01/04/dozens-more-colleges-will-pay-endowment-taxes-if-growth-rates-continue
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