Here at our Sarasota, FL headquarters, we are blessed not only with year-round sunshine but also with an arts and cultural ecosystem rivaling that of cities which are orders of magnitude larger, a cluster of academic institutions that attract students from every corner of the country and world, and a group of century-old historical icons – John and Charles Ringling, Bertha Palmer and Owen Burns, to name a few – who continue to inspire and enrich Sarasota’s tradition of entrepreneurship and artistic excellence. A wide array of cultural and educational activities are made possible by the exceptionally large store of wealth managed within the endowments and foundations that dot the local landscape. Some of these fund-pools are well-managed; management, brokerage and custody costs are reasonable; returns meet and sometimes exceed the relevant benchmarks over multiple market cycles; and the reporting and presentation of investment results are transparent. Other organizations have adopted investment programs, plagued with high costs, that routinely fail to meet benchmarks and contain exotic/illiquid vehicles that may not be appropriate for small and mid-sized endowment funds (<$25 million). Generally, these pools of charitable dollars model their investment allocation mix off of the industry’s zeitgeist – a colorful pie chart with every conceivable asset class represented. Stability of funding in the present while preserving and growing the corpus for future benefit are the guiding stars of investment committees. This is enshrined within the Uniform Prudent Management of Institutional Funds Act. Most states have adopted this law in one form or another.
For the last decade, the National Association of College and Business Officers (NACUBO) and Commonfund, have published an ongoing survey of the performance results and general allocation parameters of college endowments of varying sizes. The allocations amongst asset classes for universities with endowment assets of more than $1 billion or less than $25 million follow.
Readers may ask how these allocation parameters have fared. The short answer is “Not that well.”
As reported by Christine Williamson of Pension and Investments in a February 6, 2017 article, “Large endowments struggled with returns in fiscal year 2016"1:
- “The average one-year return as of June 30 for the 770 endowments that participated in both the 2016 and 2015 surveys was -2% net of fees vs. 2.4% as of the same date in 2015.
- “‘As in fiscal 2015, this year’s long-term average returns figure is well below the median 7.4% that most institution’s report they need to earn in order to maintain their institution’s mission,’ said the NACUBO-Commonfund release.”
- “Multiyear average annualized returns of the universe also were down sharply, with 5.2% for the three years (2015, 9.9%); five years, 5.4% (2015, 9.8%); and 10 years, 5% (2015, 6.3%). All returns are net of fees.
- “The very smallest endowments with less than $25 million in assets returned -1% net of fees, relatively better than institutions many times larger.”
As a frame of reference, a benchmark 60/40 portfolio – 60% domestic equity/40% domestic investment-grade bonds – returned 4.38% after fees during the same period. Cumberland manages this style, but with a few twists. Vanguard offers a similar 60/40 structure (VBINX) that returned approximately 3.35% before fees for FY 2016. Exposure to international markets is built into the S&P 500. An “S&P 500® 2014: Global Sales Report"2 revealed that approximately 50% of the revenues of the 500 companies that compose the index are generated from activities outside of the United States. This figure is an estimate, as participation in the study was limited to 50% of the 500 companies.
Many of these investment pools tracked by NACUBO are designed by third-party consultants, which some in the industry refer to as “outsourced chief investment officers,” who create an allocation model in conformity with an investment policy statement, select a manager or managers for each of the asset classes, and then monitor the stable of managers. Layer after layer of fees act as weights on the ankles of the ultra-marathon runner. If the models were beating the benchmarks, then the fees might be more easily justified. For larger endowments, an in-house investment team may perform a similar function – managing a portion of the assets in-house and farming out other parts of the portfolio. The results speak for themselves.
Over the last 10 years ending FY 2016, the NACUBO universe of endowments has returned approximately 5%. A 60/40 model has outperformed these multi-asset-class/multiple-fee-layer models by 200 basis points on a rolling basis.
We watch this story unfold here in our backyard in Sarasota and across the country. Our estimates put the total number of philanthropic dollars in the Sarasota-Manatee county region at about $1–$1.5 billion. The majority of these funds closely mirror the returns experienced by the NACUBO universe. So $20 million dollars per year are left unrealized or lost to multiple layers of fees.
It’s time for a gut check.
