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The 2006 fiscal year was a strong one for college endowments, which saw a one-year average rate of return of 10.7 percent, up from 9.3 percent the previous year, according to preliminary data released Wednesday by the National Association of College and University Business Officers.
NACUBO conducts the largest annual survey of endowment performance. Complete results will not be released until next month, when institutional endowment values also will be released by the association.
From the preliminary data, however, it is clear that the trend of recent years -- in which the gap between wealthier and less wealthy institutions has been growing -- will continue. The average rate of return for institutions with endowments with more than $1 billion was nearly twice that for institutions with endowments up to $25 million.
Average Endowment Returns, by Wealth of Institution, Fiscal 2006
| Endowment Size | 1-Year Average Increase |
| Greater than $1 billion | 15.2% |
| $501 million - $1 billion | 12.8% |
| $101 million - $500 million | 11.9% |
| $51 million - $100 million | 10.0% |
| $26 million - $50 million | 9.3% |
| Up to $25 million | 7.8% |
While the NACUBO survey's top wealth category starts at $1 billion, there is evidence that the relationship between endowment size and ability to earn greater returns is even present among the über-wealthy. Bloomberg recently did a survey of the 25 largest endowments (of which the smallest is $2.3 billion) and found an average rate of return of 16.2 percent.
The reason wealthier institutions perform better isn't necessarily the brilliance of their endowment managers (although wealthier institutions are able to pay top dollar). Rather, wealthier institutions generally are able to take the risks associated with certain kinds of investments that yield very high rates of return when successful, but that aren't secure enough to attract risk-averse, small endowment investors. For example, the NACUBO study found that of endowments worth more than $1 billion, 22.4 percent of funds were in hedge funds and 5.9 percent in private equity. The comparable percentages for endowments of up to $25 million were 2.6 and 0.2 percent, respectively.
Comparing the allocation of assets in 2005 and 2006, wealthier endowments shifted funds from fixed income and cash to hedge funds, private equity, real estate and natural resources.
Asset Allocation by Endowment Size, Fiscal 2006
| Asset Category | Greater than $1 billion | $501 million - $1 billion | $101 million - $500 million | $51 million - $100 million | $26 million - $50 million | Up to $25 million |
| Equity | 44.9% | 52.9% | 56.8% | 59.8% | 62.3% | 58.9% |
| Fixed Income | 12.5% | 13.6% | 16.9% | 20.7% | 22.1% | 29.0% |
| Real Estate | 4.4% | 3.9% | 4.0% | 3.4% | 3.4% | 2.3% |
| Cash | 1.7% | 1.9% | 2.7% | 3.6% | 3.5% | 5.3% |
| Hedge Funds | 22.4% | 17.4% | 12.3% | 7.8% | 6.0% | 2.6% |
| Private Equity | 5.9% | 5.1% | 2.6% | 0.9% | 0.5% | 0.5% |
| Venture Capital | 3.5% | 2.2% | 1.0% | 0.5% | 0.1% | 0.2% |
| Natural Resources | 4.2% | 2.5% | 2.0% | 1.2% | 0.8% | 0.3% |
| Other | 0.5% | 0.4% | 1.8% | 2.1% | 1.4% | 0.9% |
