Kentucky’s universities and liberal arts colleges are educating 150,000 students and employing tens of thousands of Kentuckians. In the background, paying for a portion of that, are endowments worth some $4.2 billion. Those assets are invested in everything from corporate and government bonds to real estate, stocks, hedge funds and private equity.
For each endowment, the goal is to generate more from investment returns and gifts each year than the endowments pay out to fund operations, scholarships and faculty positions at the schools. In most cases that means endowments need to generate income higher than the average 3 percent to 5 percent that they withdraw to kick in annually to the schools. They must do this while also investing in a way that protects those assets from potential market downturns.
Despite strong equity markets in recent years, generating positive net income isn’t easy, even for endowments that use professional investment managers.
In fiscal year 2016, endowments at U.S. colleges and universities earned an average investment return of -1.9 percent, net of fees, according to the largest annual survey of college and university endowments, conducted by the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute. The prior year the average return among the 800-plus endowments surveyed was just 2.4 percent.
Lower investment returns means less money going to fund various school initiatives. Unfortunately for school endowments, investment returns have been trending lower of late. According to the NACUBO-Commonfund survey, 10-year average annual returns for endowments fell to 5.0 percent in fiscal year 2016, about 2.4 percentage points below the return many schools say they need to maintain their purchasing power, taking into account annual spending, inflation and investment management fees.
“This year’s results are cause for concern,” said NACUBO President and CEO John D. Walda, in a statement announcing the 2016 survey results. “Continued below-average returns will undoubtedly make it much more difficult for colleges and universities to support their missions in the future.”
Walda noted, though, that many endowments have increased the amount of money they put toward school programs, including student financial aid and research, despite the lower investment returns.
William F. Jarvis, executive director of the Commonfund Institute, said the pressure on college and university boards and investment committees to balance current needs and longer-term demands will only increase.
The specific institution numbers listed here from NACUBO show the net changes in market value of schools’ funds, which in addition to investment gain or loss reflect withdrawals for school operations, donor gifts and other contributions, and endowment management and investment fees.
Transy, Midway beat U.S. averages
As with any investment portfolio, asset allocation is everything. School endowments need investments that are diversified enough to reduce risk so as to protect the funds but aggressive enough in the right asset classes to generate sufficient returns. In Kentucky, finding that successful blend has been a mixed bag, as it has been nationally.
The Lane Report reviewed fiscal year 2016 annual reports for 21 public universities and private liberal arts colleges in Kentucky. The reports showed the schools’ endowments contain mixes of equities, fixed income, cash, real estate, private equity, hedge funds, natural resources and private credit. But within the individual portfolios, the asset mix differences are large. (See next page.)
Transylvania University, for example, had 79 percent of its $176.3 million in total investments (of which the endowment comprised $167.3 million) in equities as of June 30, 2016, the highest percentage of any endowment reviewed by The Lane Report. Eastern Kentucky University had about 71 percent of its $44.1 million endowment portfolio in equities, and Midway University had 69.8 percent of its $21.1 million in total investments in equities. Midway listed the total value of its endowment as $24.5 million as of June 30, 2016.
Those percentages are much higher than schools of comparable size, according to the NACUBO/Commonfund survey. For schools with endowments worth between $101 million and $500 million, the average allocation to U.S. equities was 26 percent of the portfolio and 20 percent of the portfolio for international equities, for a total of 46 percent of the portfolio allocated to equities. For schools with between $25 million and $50 million in assets, the average total equity allocation in fiscal year 2016 was 55 percent – with 38 percent to U.S. equities and 17 percent to international equities.
Generally, schools with smaller endowments tended to have higher allocations to equities.
Transylvania’s high allocation to equities paid off in fiscal year 2016, helping the school’s investments earn 0.7 percent in a year when the average comparable school endowment lost 2.4 percent. Midway reported investment gains net of fees of 0.2 percent. That year, equities, as represented by the Standard & Poor’s 500 stock index, gained 4 percent, second only to bonds as represented by the Barclays U.S. Aggregate Bond index, which returned 6 percent.
EKU’s endowment didn’t fare as well, losing 3.8 percent, indicating that it’s not solely asset mix that matters, but security selection as well. That’s borne out in other schools’ experiences with their own equity portfolios in 2016. Among the 121 schools surveyed with assets between $25 million and $50 million, the average U.S. equity return was 0.3 percent, while the average non-U.S. equity return was -7.3 percent.
UK and Berea assets are largest
The big dogs of Kentucky’s endowment world are the University of Kentucky, with $1.2 billion, and Berea College, which despite having an enrollment 1/20th the size of UK had an endowment worth $1.05 billion.
UofL, with 22,640 students, listed endowment assets of $715.7 million, the only other public university with more than $100 million in endowment assets. Among private liberal arts colleges, Union College listed endowment assets of $389.2 million, Centre College $237.6 million and Transylvania University $167.3 million.
UK’s -2.2 percent change in market value in 2016 was slightly worse than schools with endowments worth more than $1 billion, which lost on average 1.9 percent. However, UK’s return was right in line with that of schools with between $501 million and $1 billion. UK’s allocation to equities – 27.7 percent including common and preferred stock – was below the NACUBO/Commonfund average of 32 percent equity allocation for schools with endowments worth more than $1 billion as well as the average 38 percent allocation for schools with between $501 million and $1 billion. The school’s allocation to alternatives, including hedge funds, private equity, global tactical asset allocation, real estate and diversified inflation strategies, totaled 63.2 percent of the portfolio, slightly higher than the 58 percent average allocation to alternatives for the largest endowments and 45 percent for the next smaller category. UK officials note that while the endowment market value slipped 2.2 percent for 2016, the return on investments was -1.5 percent.
Berea College’s endowment portfolio returned -4.6 percent in fiscal year 2016, despite the school’s 50.6 percent allocation to equities that year, likely reflecting its tilt toward underperforming international equities. The school had 28.1 percent of its assets in stocks outside the United States. Additionally, Berea College’s endowment was underweight on private equity compared to schools of comparable size, meaning it missed out on the upside from the best performing asset class that year.
Private equity real estate returned 7.1 percent for schools surveyed by NACUBO/Commonfund, and private equity in the form of leveraged buyouts, mezzanine debt, merger and acquisition funds and international private equity returned 4.5 percent. The average allocation to real estate and other private equity for schools with more than $1 billion in endowment assets was 19 percent, while for schools with between $501 million and $1 billion it was 11 percent. Berea’s allocation was 4.3 percent.
Returns affect annual support spend
Like other endowments, Morehead State lost money on its investments in 2015-2016, about 2.2 percent. That was slightly worse than other schools its size, according to the NACUBO/Commonfund figures. Endowments with between $25 million and $50 million in assets lost an average of 1.6 percent that year, slightly less than larger schools and slightly more than smaller schools.
Part of Morehead State’s underperformance that year could be attributed to its lower-than-average allocation to U.S. equities. Morehead listed a large-cap equity allocation of 15.6 percent of total investments and a small-cap equity allocation of 8.3 percent of total investments. The average allocation to U.S. equities for similar schools was 38 percent.
While most endowments emphasize long-term returns, the importance of shorter-term investment performance directly affects how much schools have to spend from year to year. Most schools base how much their endowments contribute to funding on the rolling average value of the endowment over recent years. The effective spending rate for all schools was 4.3 percent, and was higher for larger schools than for smaller schools.
Kentucky’s universities and colleges are largely in line with their peers nationwide.
At Northern Kentucky University, the endowment spending target is between 3 percent and 5 percent of a moving 16-quarter (64-month) average of the fair value of the endowment funds. The spending rate is cut by 5 percent for each 1 percent the endowment loses in value.
UK’s spending policy uses a hybrid calculation that sets a rate between 3 percent and 6 percent of the endowment’s market value. Midway University bases what it spends from its endowment each year on a three-year moving average of the fair market value of the fund. EKU distributes up to 5 percent of the three-year rolling average of the endowment’s value each year, and up to 1.5 percent of the rolling average value can be spent by the school foundation to further its mission of providing “support for the advancement of the university.”
Kentucky College and University Endowment Allocations
Eastern Kentucky University
17,000 students (fall 2015)
$44.1 million (June 30, 2016)
Equities 71%; Fixed income 23%; Alternatives 5%; Cash 1%. Details at goo.gl/G5dC65
Kentucky State University
1,694 students (Sept. 2016)
$15.4 million (June 30, 2016)
Fixed income 13%; Bond mutual funds 30.7%; Money market funds 5.9%; Real estate funds 5.8%; Equities and equity mutual funds 44.6%. Details at goo.gl/rNySTR
Morehead State University
11,000 students (est.)
$31.5 million (June 30, 2016)
Large-cap U.S. equity 15.6%; Small-cap U.S. equity 8.3%; International equity 13.0%; Cash 0.7%; Core fixed income 24.0%; Hedge funds 18.4%; Real assets 12.6%; Private equity 0.9%; Corporate bonds and stocks 0.1%; Annuity 0.4%.* Details at goo.gl/SEuRZg
* percentages of $41.8 million in total university investments
Murray State University
10,495 students (fall 2016)
$19.2 million (June 30, 2016)
CDs and money market mutual funds 5%; Mutual funds 59%; Equities 4%; Fixed income 31%; Other 1%.* Details at goo.gl/L9B4J9
* 96% of funds are invested with the MSU Foundation, whose percentages are listed
Northern Kentucky University
14,566 students (fall 2016)
$89.6 million (June 30, 2016)
Short-term money market funds 0.007%; Cash 0.5%; Core fixed income 1.7%; Core plus fixed income 5.3%; Global fixed income 2.0%; High-yield fixed income 1.8%; TIPS 1.7%; Large-/mid-cap equity 27.7%; Small-cap equity 1.9%; International equity 6.3%; Emerging markets equity 7.7%; REITs 0.01%; ETFs 0.04%; Hedge funds (public natural resources MLPs) 3.4%; Remainder interest in real property and other 0.6%; Private equity 5.2%; Private debt 2.2%; Natural resources 10.5%; Value added private real estate 1.5%; Low-volatility diversifying strategies 11.0%. Details at goo.gl/APT4it
University of Kentucky
Cash 0.7%; Common and preferred stock 3.0%; Corporate fixed income 0.5%; Gov’t agency fixed income 0.2%; Absolute return 11.4%; Equity 24.7%; Fixed income 6.0%; Global Tactical Allocation 6.6%; Long/short equity 13.5%; Private equity 14.2%; Real estate 10.5%; Diversified inflation strategy 7.4%; U.S. Treasuries 0.9%. (Dec. 12, 2016 targets) Details at goo.gl/zeiPsQ
University of Louisville
22,640 students (fall 2016)
$715.7 million (June 30, 2016)
Mutual funds 9.4%; Preferred and common stock 5.5%; Equity method investments 0.5%; CDs 1.1%; Alternative credit 1.8%; Alternative U.S. equity 10.6%; Alternative international equity 24.0%; Equity long/short hedge funds 6.6%; Multistrategy hedge funds 6.6%; Natural resources 5.1%; Opportunistic hedge funds 3.2%; Private equity 13.9%. Details at goo.gl/b86Qxf
Western Kentucky University
20,271 students (fall 2016)
$51.7 million (Dec. 31, 2016)
CDs 3.0%; Mutual funds 77.8%; ETFs 3.2%; Equities 0.5%; Marketable alternatives 11.9%; Real Estate 1.9%; Private equity 1.7%.* Details at goo.gl/7za3tp
* WKU Foundation investment estimates Dec. 31, 2016, endowment comprises 61%.
Alice Lloyd College
Asset allocation – None available
1,838 students (fall 2016)
$38.1 million (June 20, 2016)
Cash and cash equivalents 2%; CDs 5.5%; Common stock, mutual funds, money market funds, ETFs, closed-end funds 59.3%; Limited partnerships and LLCs 33.2%. Separately listed $14.6 million in alternative investments – Private equity 16.8%; Multistrategy hedge funds 61.3%; International equity 10.3%; Global debt 11.6%. Details at goo.gl/yDaewS
$48.6 million (June 30, 2016)
Cash and equivalents 0.5%; Equities 26.9%; Fixed income 15.8%; Private equity/venture capital 7.2%; Alternatives 18.6%; International equities 21.4%; Other marketable
securities 2.3%; Real estate 7.3%. Details at goo.gl/FsBSfp
$1.05 billion (June 20, 2016)
U.S. equities 22.5%; International equities 28.1%; Corporate notes and bonds 6.3%; U.S. government securities 6.4%; Private equity 4.3%; Hedge funds 13.8%; Special opportunities 6.5%; Commodities 4.8%; Short-term investments and cash 6.9%; Real estate 0.3%. Details at goo.gl/AQLxqv
1,425 students (fall 2016)
$237.6 million (June 30, 2016)
U.S. government debt 0.5%; Equities 43.5%; Private equity 23.2%; Alternative equity 6.7%; International equity 15.3%; Debt 10%; Other notes receivable 0.5%; Other 0.2%. Details at goo.gl/Ec5kJf
$30.9 million (June 30, 2016)
Cash equivalents 1.4%; Mutual funds 36.8%; Equities 42.7%; Debt 1.7%; Cash surrender value of life insurance 0.8%; Real estate 1.0%. Details at goo.gl/xnpVa4
Kentucky Wesleyan College
$34.3 million (May 31, 2016)
U.S. agency securities 0.5%; Corporate bonds and notes 1%; Large-cap equity 16.6%; Mid-cap equity 0.2%; Small-cap equity 1.5%; International equity 24.6%; Other common stock 0.1%; Commodities 6.0%; Bonds 18.1%; Off-shore hedge funds 8.2%; Other alternatives <1%.* Details at goo.gl/n983f4
* Percentages of $28.1 million in listed investments.
Lindsey Wilson College
$20.8 million (June 30, 2016)
U.S. government securities 14.8%; Corporate stocks 67.8%; REITs 4.0%; Bonds 10.2%; Cash equivalents 1.2%; Trust 1.9%.* Details at
* percentages of $21.6 million in listed investments.
$24.5 million (June 30, 2016)
Cash and cash equivalents 3.2%; Equities 69.8%; Government securities 3.1%; Debt securities 20.8%; Mortgage notes 1.3%; Real estate 0.4% Mineral interests 1.4%.* Details at goo.gl/gkpLJF
* percentage of $21.1 million in listed investments
Thomas More College
1,826 students (fall 2016)
$19.5 million (May 31, 2016)
Mutual funds 27.6%; Common stock 50.1%; U.S. government securities 4.0%; Government bonds 8.8%; Corporate bonds 5.9%; Municipal bonds <0.1%; Money market fund 2.7%; Other 0.2%.* Details at
* percentages of $17.1 million in listed investments
Money market funds 2.4%; U.S. gov’t and gov’t agency debt 9.5%; Corporate and gov’t mutual funds 0.7%; U.S. equities 79.0%; Non-U.S. equities 7.3%; Other securities 0.4%; Assets held in trust by others 0.8%.* Details at goo.gl/JF6UJs
* percentages of $176.3 million in listed investments
2,203 students (fall 2016)
Short-term investments 1.8%; Common stocks 37.4%; Fixed income 9.2%; Private equity/venture capital 8.8%; Multistrategy funds 4.0%; Debt-related funds 3.4%; Hedged equity funds 19.5%; Emerging markets funds 4.1%; Distressed debt 4.1%; Real assets 7.4%.* Details at goo.gl/uKKCcd
*percentages of $428.1 million in listed investments
University of Pikeville
$20.5 million (June 30, 2016)
Cash and cash equivalents 11.7%; Fixed income 22.8%; Marketable equity 64.8%; Mineral interest 0.7%.* Details at goo.gl/5w1jFm
* percentages based on $13.8 million in listed investments
Source: Institutions’ annual reports
Chris Clair is a correspondent for The Lane Report. He can be reached at [email protected]