Apples and Oranges: Applying the NACUBO Findings to Smaller Organizations

Audio Description

The NACUBO Study of Endowments is considered the definitive benchmarking report for the nonprofit sector. But the average endowment size for respondents is close to $1 billion. In today’s episode, we distill the findings for small- to mid-size mission-driven organizations. Rather than wading through hundreds of pages, Bernstein Senior Investment Strategist Greg Young joins Clare to get to the “so what” for your organization.


00:00 - 00:34

The NACUBO study of endowments is considered the bellwether for all kinds of investment-related benchmarking in the nonprofit sector. And while it focuses on higher education, it really is widely referenced for questions around asset allocation, investment performance and spending. But the average endowment size in the report is close to a billion dollars. So today we're really going to explore what some of the findings mean for the small to midsize end of the market. Hi, everyone, and welcome to Inspired Investing.

00:34 - 00:58

I'm your host, Clare Gola, Head of Endowment and Foundation Advisory Services at Bernstein. This podcast is where we strive to connect and share insights with listeners like you who are engaged in the nonprofit and broader philanthropy sector or who just want to learn more. Today, I'm joined by Greg Young, Senior Investment Strategist, to help me unpack the NACUBO findings. Greg, thanks for being here. Hi Clare, thanks for having me.

00:59 - 01:19

So first, I just want to spell out the NACUBO report, N-A-C-U-B-O, includes respondents from the National Association of College and University Business Officers. So the results are highly anticipated every year. And this year everyone was especially interested to quantify the impact of the pandemic. So I want to start with performance.

01:19 - 01:39

What can you really tell us about the outcomes both for smaller institutions as well as the larger ones? Yes, Clare, it's pretty straightforward. The larger the pool, the greater the increase in the market value. It really was a case once again where the big got bigger and unfortunately the small got smaller.

01:40 - 02:11

So, alas, the divergence of the haves and have nots rears its ugly head once again. So, Greg, one factor that accounts for the change in market values is investment performance, of course. So the very biggest endowments, perhaps not surprisingly, generated the highest average returns of about two and a half percent. But interestingly, the second-best performers were the under $25 million pool. They were just five basis points behind those very, very large institutions. Why do you think that is? That was an interesting outcome.

02:11 - 02:44

The most likely explanation is that the larger pools historically allocate a higher percentage in private equity and venture capital. And look, they tend to have access to the most sought after managers. But for the very smallest pools, look, they had an average of 70 percent of their assets allocated to US public equities and bonds, which experienced the strongest recovery in the three months following the trough. That and a greater reliance on indexing strategies probably explains that gap.

02:45 - 03:20

And I should mention, I mentioned earlier two and a half percent. One thing that a lot of folks overlook with the NACUBO study is that it is on a school-year fiscal year, right, is that June 30th of year-end, fiscal year end. And so what that means is this year-end was capped right after, right, Greg, the downturn in 2020. So that's an important one. So if anyone out there, if you are an investment adviser saying, oh, but you did you did way, way better than the NACUBO average. Make sure that you're not comparing apples to oranges there.

03:20 - 03:54

So on average, I did want to mention that returns for endowments were barely two percent in that fiscal year-end June 30th. And that's compared to average returns over the last three and five years, which have been just over five percent. Given that the average spending rate is somewhere around five percent, what do these lower average returns really mean for spending going forward? Well, the numbers are not encouraging. Assuming a modest two percent inflation rate and unchanged spending at around five percent, these institutions are going to have to find a way to clear seven percent just to stay in place.

03:55 - 04:10

And that's going to be a tall order with much lower future return expectations. And I should quickly add, that's assuming inflation of only two percent; if that turns out to be worse than we're expecting than the math just gets that much harder.

04:11 - 04:41

So how does this line up with Bernstein's long-term forecast for global stocks and bonds? Looking back over the last 10 years, the average endowment in the survey earned a return of about seven and a half percent. And that's not just in equities, but across the whole portfolio of stocks, bonds, alternatives, et cetera. But Bernstein's forecast of global stock returns for the next 10 years is around five percent and just one percent for intermediate taxable bonds. So think about that.

04:41 - 05:10

A diversified portfolio with those two anchors averages out to just shy of four percent. That's assuming a 70/30 mix, and that's before adjusting for inflation. And that's 1.7 percent in real terms. So do the math. Targeted returns have to not only fund the designated spending goals and cover inflation, you have to also consider fees, expenses as well as other items.

05:10 - 05:31

And meeting these goals will be quite a challenge with public market returns so compressed. So, Greg, that's really depressing. And maybe I shouldn't have had you as a guest today, but I know that Bernstein actually isn't out of...out of line with what some of our peers out there in the industry are saying. This is fairly consensus that

05:31 - 06:05

returns across the publicly traded markets are going to be lower, and so the question is then clearly smaller endowments and foundations... And by the way, foundations, private foundations are required to spend five percent of their year-end asset value. So there's another layer for all of the private foundations out there that you're going to have to overcome. And so clearly, these smaller endowments and foundations are going to find that meeting the goals are quite a challenge with these returns being so compressed. So it really begs the question, what can be done? I mean, can you walk us through some of the options? How are you advising clients?

06:06 - 06:33

Look, ideally, part of the solution would be to have more money coming at the door with less going out, spend less, improve fundraising, etc. Unfortunately, that's probably easier said than done. So from an investment standpoint, that the risk of oversimplifying what I'd say is there really are only four things that funds can do. First, they can lower their return expectations. Understandably, that's not terribly palatable.

06:33 - 07:06

But there you are. Second, they can take on more risk in their allocation. That means usually more equities, less bonds. Third, if market returns, beta returns are depressed, they can embrace active management, try to produce more alpha out of the assets that they have, or finally, we think they can lessen their reliance on the public markets and consider more nontraditional investment alternatives, that could be liquid or illiquid, marketable and private.

07:07 - 07:33

And look, that's really it. Obviously, there are trade-offs with each of these, but that's the menu to choose from. And as the saying goes, hope is not a strategy. So sooner or later, we all have to confront that reality and adjust. Yeah, it's tough, right, there are options and none of them are particularly attractive.

07:33 - 08:00

So let's actually let's assume at the outset, right, that reducing return targets is sort of off of the table. Right. Because for some organizations, for instance, private foundations, they're not actually funding the organization anymore. The fundraising may be challenged. And by the way, we're going to do another podcast on the Lilly School of Philanthropy, the most recent report on fundraising. So let's start here. So let's assume at the outset that reducing return targets is really off the table.

08:00 - 08:22

Where would you go next? Well, look, when we look back over the last fiscal year, exposure to US public equities was likely a large part of the reason why these smaller funds did better. When we look at the survey, over three quarters of the allocation for these smaller pools was invested across US public equities and fixed income.

08:22 - 08:55

The problem is we believe that could lead to a false sense of security in the years ahead, given these lower return forecast. Yeah, I think it's interesting because we've been mentioning the fact that we believe returns will be lower, coupled with volatility potentially being a bit higher looking ahead than we've seen historically. The problem is we've been saying that for a couple of years now. And in organizations are like, yeah, we heard you two years ago. We heard you last year. Is it really true this time? So I agree. I think there is sort of a false sense of security there.

08:55 - 09:29

And yes, moving to a 70/30 allocation rate could make a difference. But one of the things that I know a number of organizations are asking us about and really, frankly, individual investors as well, is so if interest rates are so low, I mean, why are we even invested in bonds? Right. Tell us a little bit about that part of the investment allocation, sort of the traditional asset allocation and what we're seeing going ahead. It is really that conservative, more risk mitigating part of the portfolio is an area that we're likely going to have to spend a lot of time with.

09:29 - 09:51

And what that means is, for the typical institution, not only does this mean likely fewer bonds in the allocation going forward, it really does impact how we're going to invest in that part of the portfolio. Now, what do I mean by that? Well, as bond investors, we've all been spoiled. Think about here in the US.

09:51 - 10:08

We've been blessed with this multi decade period of declining interest rates. Right. That gave bond investors a tailwind that allowed us all to enjoy great returns and a nice diversifier to stocks. Unfortunately, we really do think this is the time,

10:08 - 10:37

finally, what that era has ended. We may see rates stay at these lower levels for longer, but the catalyst behind ever declining rates is probably over. And that's especially true, Clare, for the next few years as we emerge from COVID, the economy opens back up, and we all return to some semblance of normal. Eventually rates have to rise; by how much and when is probably a subject for another day.

10:37 - 10:59

But let's just assert that for the moment, and if we're right, that poses a problem. Finding both acceptable returns and consistent risk management from the same bond portfolio like we have in the past is probably going to be next to impossible. So, look, rising rates eventually do mean higher yields and we should all welcome that.

10:59 - 11:14

But in the meantime, we've gone from a tailwind to a headwind. So that's going to make things a lot more challenging going forward, less ability to cushion the blows from volatile stocks and just diminished returns. It's not a very good combo.

11:14 - 11:31

So that actually leads to another conversation we've been having with many clients, which is really about, it's not so much today about, well, what kind of rate can you get me on my money market and what kind of rate should we dip down in credit quality to get in search of yield,

11:31 - 12:05

it's more about, OK, let's really appropriately frame how much you should size, how much you should keep in your short term, intermediate term reserves that need to be allocated more conservatively, so that we can lean in for those longer horizon strategies and not have so much exposure to fixed income, the traditional fixed income. It's a tough situation. So in terms of your second suggestion, active management, you recently authored a blog on this.

12:05 - 12:08

Can you give us just a quick synopsis on it? Sure.

12:08 - 12:40

We all know there's been this decades-long trend from active to passive, but we think we may at long last be on the cusp of an environment that is going to be more conducive to active management. And you're right, we did write a blog about this recently. Certainly encourage our listeners to check it out. In it, we talk about the importance of the economic and investment cycle that we've been in, and how that's almost certainly going to change in the future. Indeed, it's already changing as we speak.

12:40 - 13:15

For example, we're moving from an era of constantly falling interest rates to one where rates start to move back up. We're talking about a future that is characterized by below-average returns, almost certainly accompanied by higher volatility instead of the other way around. And it's likely to be one where we have greater dispersion among stocks, which diminishes the tendency of stocks to move up or down in lock step, and look, that provides more opportunity for stock pickers to find companies that can beat the market.

13:15 - 13:35

Now, nothing is for certain, but all of these things suggest to us that the risk-reward trade-off may finally be swinging back around in favor of active management. Thank you for that. I think it's nuanced in terms of the underlying factors that could lead to or support rewarding active management.

13:35 - 13:47

But speaking of active risk, I'm going to lean into one of my favorite topics and certainly a very popular topic among our not-for-profit and foundation clients around the country.

13:47 - 14:22

And that is aligning your investments more closely to your mission or values or what the organization stands for. And so some folks term this responsible investing. That means different things, right, to different organizations, but certainly aligning your investments or investing the other 95 percent of the portfolio in a way that supports the mission of the organization is another way to potentially increase the impact. But you may not be able to spend more towards the mission of the organization or the programs.

14:22 - 14:54

But you certainly are aligning what you've got invested in that entire corpus in a more positive way. So we did a recent podcast on this topic. I'd love to hear from you, Greg, on what you're seeing out there with the committees that you work with. Sure, look, this whole area of responsible investing is only going to grow in the years ahead. We're seeing more and more funds are embracing it. And we see that in these latest NACUBO surveys. Our listeners might ask, what does responsible investing have to do with improving returns?

14:54 - 15:20

So let me give you a grossly oversimplified answer, and that is, responsible companies simply make better investments over time. Responsible companies tend to do better by all of their stakeholders. They tend to treat their employees better and thus have lower turnover. They tend not to get sued as well; they don't get in trouble with regulators as frequently and so on and so on. Notice what I'm not saying here.

15:20 - 15:54

We're not saying that a company's efforts to make the world a better place with happier employees and a cleaner climate is the only thing that matters, or frankly, even the most important thing. But what we've observed over a long time of managing money at Bernstein is that responsibility tends to lead to better financial outcomes. And after all, that's really what we're seeking at the end of the day as investors: better financial outcomes should lead to better performance and we all need as much of that performance as we can find.

15:54 - 16:10

All right, that's great. Thanks, Greg. And I also note there from your comments that it's not just about eliminating certain companies or sectors from your portfolio, but it's really leaning into those best actors. Right. Those who are really taking the lead and acting as an example for others. So that's excellent.

16:10 - 16:41

I did want to note and we'll talk more about this in the future, but there is another strategy that a number of foundations are asking us about, and we don't necessarily need to go into it here. But in an environment where we're expecting lower returns, higher volatility, and private foundations in particular need to spend five percent from their portfolio, program related investments, direct investments that can count towards that five percent required annual distribution are an interesting strategy as well.

16:41 - 16:48

Not for everyone, but we'll certainly have more to talk about on that in future episodes as well.

16:48 - 17:20

That somewhat ties in, though, Greg, to this last option, which you mentioned, which is lessening reliance on the public markets and digging into alternative investments. It's been long, long, long the case that these larger institutions, right, definitely invest more heavily in alternatives and less liquid assets than smaller ones for a variety of reasons. And the latest NACUBO study shows that this trend is alive and well. It's probably going to grow larger. How are you advising clients? Well, that's right. Look, like everything in investing, we know there are trade-offs.

17:20 - 17:50

Simply adding a big slug of alternatives to the allocation and expecting all our problems to be solved is not what we're suggesting. We actually published on this topic extensively at Bernstein. If you'll permit me here, Clare, I'll put a plug in for an excellent piece that was written called A Framework for Allocating to Illiquid Investments. It really gets into all of these different issues. I would consider it a must-read for any listener that wants to dig in deeper.

17:51 - 18:08

That said, our advice to clients is to take a fresh look and see if this area is a good fit for your institution. We have a lot of experts and a lot of tools to help you do that. So please speak with your Bernstein representative and let us help you there. That's good advice.

18:08 - 18:30

And I do want to remind folks, if we're focused on sort of the smaller and mid-sized market here in this conversation, that's different than individual investors; for institutions to become an accredited investor, you need five million dollars in your portfolio. That sort of starts to open up your universe to different types of investments that you can... and certainly some less liquid investments.

18:30 - 18:46

And then to be a qualified purchaser, which opens up that universe even more, you need to have 25 million dollars in your portfolio. And so oftentimes we have conversations with organizations that may have 26 million dollars in the portfolio or 15 million dollars in the portfolio.

18:46 - 19:09

And some of the individuals on the committee are thinking that they may have options to invest in more types of investments than than they do. And so just a reminder there, and absolutely there are trade-offs, right? Just because you can doesn't mean you should in every case. But it might be the right thing for you. Again, like everything in investing there are trade-offs.

19:09 - 19:31

Greg, before we wrap up. Final thoughts? Anything that you'd like to share that maybe we didn't touch on today for the listeners out there. We've covered a lot of ground in this podcast. And I think the takeaway at first, it could sound like things are going to be pretty dire. I hope that's not really the takeaway.

19:31 - 20:04

I think what we were trying to convey, frankly, is just a sense of realism, but that there are options, there are ways to deal with what is likely to be the reality going forward. So this is by no means an insurmountable challenge. This is what we spend our time focused on, all of us at Bernstein and particularly those of us that work in the endowment and foundations space, we spend our time focused on helping our clients solve these problems.

20:04 - 20:27

And we think the future is going to be something that we can succeed in. And we look forward, hopefully, to having that opportunity to do that for more and more people. Thanks, Greg. Yeah, look, the NACUBO study is well over 100 pages, so hopefully some folks can just listen to this, get the high points. Right. But the other thing is it's over 100 pages and it doesn't necessarily need to put some thought into this,

20:27 - 20:44

so what? So what for my organization? So what for our situation? That's critical and that's where you need advice. So I appreciate your thoughts on that, Greg, and thank you for joining me today. Before we wrap up, you did just update, right,

20:44 - 21:18

a new white paper, Balancing Structure and Flexibility. That's true. We did. I think the best way to describe it, frankly, is that we tackle a lot of these same subjects that we talked about here today, the NACUBO survey, if nothing else, has just reinforced, what we already expected to be the case going forward. And I guess that in a little bit more broader format, we're simply tackling a lot of these same challenges, getting into some more the nuances and the details. So hopefully that could be just another resource that will be helpful to our clients.

21:18 - 21:23

Awesome. OK, thanks, Greg. Thanks for joining us today. Thank you for having me.

21:24 - 21:27

All right. And thank you, everyone, for listening.

21:27 - 21:44

If you'd like to learn more on Bernstein's Endowment and Foundation Advisory Services, please see the link to our blogs in this episode's description. If you enjoyed this episode and haven't subscribed to our podcast yet, please go to the iTunes store, Google Play, or wherever you listen to podcasts to subscribe and rate us.

21:45 - 22:07

Also, please email us with your thoughts, questions, and feedback to, and be sure to find us on Twitter at BernsteinPWM. Thanks, everyone. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at

Clare Golla
National Managing Director—Philanthropic Services

The information presented and opinions expressed are solely the views of the podcast host commentator and their guest speaker(s). AllianceBernstein L.P. or its affiliates makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this podcast. This podcast is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

Related Insights