NACUBO: A Practitioner’s View

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Okay, everyone. Our ever popular breakdown of the annual NACUBO report on endowment investment outcomes is back. But this time we have added a twist along with expert investment analysis. You'll hear today also from a practitioner who will make these survey results come to life.

Hi everyone. Welcome to Inspired Investing. I'm your host, Clare Golla, head of Philanthropic Services at Bernstein. This podcast is where we connect and share insights with listeners like you who are engaged in the nonprofit, philanthropy, and broader social sector. Today, I've once again invited my colleague, Greg Young, senior investment strategist, to walk us through this year's NACUBO study.

And by the way, that is the National Association of College and University Business Officers. But this year Greg is gonna be joined by a special guest. Beverly Wadsworth leads Institutional Advancement at Minneapolis College, and she also serves as the executive director of the Minneapolis College Foundation.

And prior to that, she spent a decade working in advancement at the University of Minnesota. So her experience working at both smaller and larger institutions and her expertise on fundraising is really gonna enrich our discussion today. So thank you both so much for joining. Thank you. Thanks. All right, so I'm gonna start, I'm gonna kick it off with Greg.

So Greg, why don't you start by giving us the top line on performance for this year. And remember everyone, it's fiscal year July 1st, 2021, through June 30th, 2022. What did we see this year, Greg? Yeah. Thanks 

Claire. You know the interesting thing is that when we look back over the fiscal year 2022, we have this fascinating sort of boom bust situation and all of that contained within this 12 month time period.

It's almost like a market cycle contained within one year. As we all know, calendar year 2022 marked a very sharp reversal from previous years with a big story. Being the persistent rise in inflation in the Fed's, very aggressive tightening of monetary policy. So as a result, interest rates moved up sharply higher and public markets sold off virtually across the board.

But when I look at this survey, my big takeaway is sort of counterintuitive given how be. The markets performed in 2022, and that is that overall endowment funds in the survey did much better than you would think from just looking at the headline. So I thought that was pretty remarkable. 

But Greg, how would you, I mean, that's so weird, right?

How do you explain that? 

Yeah, that's a great question. When you look at the survey across the board, the value of all of the assets was only down 4%. From the prior year survey, which I'll remind everyone came after a period of very good return history and the fact that the fiscal year 2022 values were down So little I think can really be explained by two things.

First of all, as you would expect, asset allocation decisions and investment performance really had a way of blunting the impact. So the average endowment in the survey was down eight. But the overall decline in market value would've been much greater were it not for the surge in gifting, which was 14 and a half billion compared to a little under 12 billion in the previous year's survey.

So even with the challenging backdrop, reported gifts rose handsomely. 

Yeah. So we'll get back to this whole average endowment being down 8% because we wanna dig into that average a little bit, I think. But I'm, this is really interesting about this surge in gifting and so Beverly, this is a great moment to bring you into the conversation.

Being in development and fundraising, um, at a much smaller institution, Minneapolis College. Is this consistent with what you're seeing on the front lines? Yes, absolutely. 

We had a lot of, uh, gift activities, some new donors, and especially. Toward the fall and the end of 2021, the calendar year, uh, we received a million dollar gift, which only happens a handful of times.

And we saw greater giving on the part of some of our business partners as well, who had this opportunity to have their dollars matched dollar for dollar by the state of Minnesota. 

And what do you attribute some of that strength in those couple of years to? 

I think one is the strong markets for sure.

People you know, maybe. A little more income that they have at their disposal to do things with. Also, I think, uh, current events too. Minneapolis College is one of the most diverse higher ed institutions in Minnesota. We have more than 50% of our students. Our students of color and donors responded to the needs of our students during C O V I D, as well as during the social unrest in the aftermath of the murder of George Floyd, which of course happened right here in Minnesota.

Okay. That's, that's really interesting. Um, maybe we can unpack that a little bit. So how might this have, maybe would this have differed if you were at say the University of Minnesota still? Um, cuz as we mentioned, you were at a much larger four year institution prior. 

Mm-hmm. Yeah, so I think one of the biggest differences that I've noticed is just the awareness of and how well we use philanthropy, both on the donor side and also just internally from the college and the foundation, you know?

We don't have as strong an annual fund as like the University of Minnesota, for example, or those really consistent long-term annual fund donors who then will make a major gift or something. So sometimes our we're a little bit more subject to sort of the inclinations of donors or, you know, just the, the, the markets in a.

Yeah. You know, one of the interesting things is that, um, you mentioned that you received this major, you know, this million dollar gift, but it's not like you're receiving that right. On a constant, on an, because your, your base of donors isn't as large. And so the other piece is, um, that, you know, it seems like the largest four year institutions.

Are a bit further ahead than their peers. What the smaller peers, I should say? Mm-hmm. When it comes to leveraging philanthropy, right? To make up those gaps in investment performance. So maybe you could, uh, speak a little bit to the makeup of how your revenues work at smaller institutions. 

Yes, yes, yes. So I think one of the biggest differences is the college experience.

And while some community and technical college students come to us right out of high school, many others begin or return to college at different points in their lives. You know, they have family responsibilities, jobs, bigger household obligations, and this is very d. Then the majority of students at four year, many four year institutions, for example, the average age of our student is 26.

11% of them are parents, and 70% come from underrepresented communities. And this is what really motivates our donors to give. On the other hand, there hasn't been a tradition of a really strong, maybe coordination between the community college foundation and the colleges to document engage and nurture.

Uh, alumni relationships to really cultivate them into, you know, larger, ongoing year over year giving. You know, some people might think that a community and technical college you don't have. You know, the same level of donors, but we do have quite a few alums when we really start looking at this and being in very intentional about building our alumni base, we have very successful entrepreneurs out there, uh, business owners and things like that.

Yeah, it sounds, it sounds to me like it's, um, earlier stage, right? Like. Your alumni base isn't going back to, my family was on the Mayflower and we've been going to this Ivy League institution for however many, right? You know, like, and we've been giving these large amounts and endowing chairs, right?

Mm-hmm. This is. I grew up in Minneapolis. I'm, you know, like working full-time. I'm going to this school, I'm starting a business, and hopefully, you know, first generation success in many cases. And so, you know, th this I would think would filter over to then awareness of philanthropy. Right? And kind of like how that works.

So could you share a little bit about how much you think comes down to a. Yes. 

I think a lot comes down to awareness and just the tradition of it, right? Compared to four years, there's still sort of this learning curve and we are just starting to get more on that track of adopting what are some of these best practices and how can we really leverage philanthropy.

So I think there's, there is a growing awareness of that now. It takes a little bit to understand when you haven't really leveraged or depended on philanthropy to fill the gaps. You know, like in four year schools, um, it takes a little bit of just education of the staff too, and donors and everybody of the power and what's possible.

Right. That's so interesting. And we all know it's gonna take 10 times as much work, you know, to, to generate 1,000, you know, a thousand dollars gifts. Mm-hmm. Versus the 1 million. So, Greg, this actually, I, I wanna turn back to the report here because it raises another difference, I think between the larger and the smaller endowments.

I know we've talked a lot about this, but. It feels like alternative investments are also a little bit earlier stage for some of these smaller institutions too. So what did you see? What did you see, uh, in terms of how things played out this year? 

Yeah, alternatives. Claire continued to be sort of a dividing point between the institutions, and last fiscal year was no different.

It just sort of is a continuation of the same song that we've been seeing. But just the next verse. Most private asset classes produced positive returns during the period, so the average return for endow. And their private debt portfolios, for example, was over 6%. Venture capital private equity were up between 12 and 16%.

Private real estate was up over 20%. But here's something that really caught my eye. Across all reporting institutions, not just to larger funds. The percentage allocated to just private equity and venture capital, which was 30%, exceeded the amount in public equity, which was right around 28%. 

So the largest institutions have even more in private equity right than than public equity.

Now, is that. Yeah, really across all of the institutions, but especially driven by the larger ones. I mean, that's just to note, right. So how, however, did, um, alternative investment strategies ultimately impact returns in terms of sort of the dispersion right across managers, for instance? Yeah, the dispersion again, was another feature, and of course it's the same sort of size, um, conundrum.

So again, just to give you some numbers, Over the survey period, the largest pools, the largest asset pools among the endowments had a median return of down four and a half, while the smallest, at the opposite end of the spectrum, their median return was down a negative 12 and a half. As we've remarked before, asset allocation really does explain the lion share of that delta.

The largest funds have about a third of their assets in private equity and venture capital versus less than four. So that's gonna be one of the big issues. And what we've seen for a long time is that the smaller institutions consistently bias their portfolios toward public equity and fixed income for a host of reasons, but one of which is likely due to not as easy a access to the best managers in the private space.

You know that along with things such as fees and lockups, et cetera. They just sort of come with more complexity when you're talking about those types of assets. And then just sort of the last point along with the types of assets, this has also been a consistent theme from year to year. We see this continuing preference for active versus passive, and it just sort of plays out almost in a linear fashion based on the size of the institutions where smaller funds lean more toward passive.

Compared to the larger pools when it comes to their public equity and fixed income. So when you say passive, just so I'm clear, you mean like index tracking, ETFs indexing? Yeah, 

exactly. Okay. If we could give sort of one piece of advice, particularly to our sort of smaller clients or those pools that are on the smaller end, is that they really should think seriously about at least exploring the option of adding private or alternative invest.

Of course there's no, there's no free lunch. There are always trade offs, but sized appropriately. We think that the, the diversifying assets like the more non-traditional areas can really help solve the conundrum that we all, as investors face..

All right. That it's so helpful, Greg, because when we look at forecasts, right, looking ahead, we anticipate that over the next decade, let's.

Public equities, right? The median compound return, annual return for publicly traded global equities is something like 7% or maybe a little over 7%, right? Correct. At least you're gonna earn something in your bonds, again, which we could, you know, high quality, fixed income, maybe. Let's say it's about 4%, um, but that still doesn't get you to where you need to be.

After inflation, right? I mean, it seems like certainly I'm not espousing right that a $30 million portfolio should invest like a $30 billion portfolio or, you know, even, you know, a, a $5 million portfolio should invest like a $5 billion portfolio. But there are solutions, Greg, remind us what the thresholds are to be an accredited and to be a qualified purchaser as, as a public institu.

Sure. The accreditation for an accredited investor, the cutoff is at 5 million. At least 5 million in investible assets. And the, the threshold to be considered a qualified purchaser is up at 25 million.

Okay. And so I would argue that there are a lot of endowments out there. There are also a lot of, you know, other types of, of organizational accounts out there that, that meet those thresholds and could consider.

Uh, along with, you know, communication on all of these trade offs, right? So a lot of this is about education. There's no question about it. We work with lots of organizations and institutions that say, oh, I don't know. I think we're too small for this, or maybe we don't have the liquidity, or, you know, and when we dig in, then we can really understand if that specific institution, if it makes sense for them or not.

Um, but you need to have that education and that dialogue. And so, Beverly, I'm gonna turn to you because I think there's a similar. Education and dialogue on the revenue side with donors as well. When you're working with donors, um, of, for instance, a, a two year institution like yours, could you maybe give us an example of the educational process?

Yes, yes. Thank you. I mean, just sitting here listening to the two of you talk, I'm thinking, yes, this is what we're hearing from. Max at Bernstein, you know, and it's always trying to encourage us to think, but, you know, to think in a different way and Exactly. We think, oh, we're too small or that's riskier or something.

So, uh, what, what ends up happening then is that we re rely more on annual giving and grants and things like that, uh, rather than being able to really grow our different individual endowments and other. Uh, to the next level. And I recently had a conversation along this line with a retired faculty member, uh, who has an endowment with us.

And her goal has really been to get her endowment to a hundred thousand dollars by making smaller gifts over time and by watching it grow. She's almost there. And actually it was just over a hundred thousand at the end of fiscal 21. And she intentionally made a larger gift to get it to this level, and now it's below.

Now it's like, you know, at 97 or something like that. And, and so she's frustrated because she has in her mind that she wants her endowment to be at this level to be able to pay out a. Size of a scholarship each year, you know, so it's just, you know, teaching about that. And then also it sometimes it's tricky for our donors to understand that, you know,

our fiscal policy, our spending, is arranged and needs to fluctuate based on the market and the return so that none of our funds go underwater or anything like that. Right. 

You use, sorry, but you use a smoothing policy right? Over the last Yes. Five years. 

Yes. Five years. Mm-hmm. Yeah. Mm-hmm. Yeah, we do. But sometimes when the donor wants to have a report on What's my endowment?

You know, they can see. Falls, you know, themselves. Yeah. 

Mm-hmm. So this is an interesting one that I wanna touch on. It was an important part of NICU's report this year. And I'll, I'll start with Greg, the concept of responsible investing. So, Greg, you know, we've spoken in the past on this topic, there was quite a bit of actually, you know, publicized criticism or a little bit of a backlash, especially as the thing that did best was energy.

And so let's talk a little bit about E S G. Environmental, social and governance factors alongside traditional financial metrics and what's in the report and what's your take on it? Yeah, the, 

once again, the NACUBO survey shows that the E S G related INVESTINGS is still very much alive and well over half of the survey respondents incorporate at least some element of responsible into their choice of managers.

But I should note that when it comes to reasons why endow. Don't invest in this arena. The number one reason, not surprisingly, is potential adverse impact on investment performance. And this really isn't surprising, considering last year was one of the most lopsided examples of sector dispersion that we've seen in the equity markets with energy stocks up dramatically for the calendar year and everything else was.

In many cases down a lot. So it just sort of reminds us that responsible investing is not risk free as we tell clients, but there are. Sound long-term reasons to consider investing this way for some or maybe all of their portfolio while we're on the same subject, one of the other observations that we saw is the percentage of endowments reporting that they have a formal policy addressing diversity, equity inclusion when it comes to their investment manager selection.

This continues to increase. I would expect to continue to see going. 

That is really interesting. You know, it's funny to move from the conversation on alternatives to the conversation on responsible investing because I would argue that in both cases, some of the criticisms or the concerns kinda lump all of them into one bucket.

Beverly, you mentioned earlier, like some committee members maybe concerned about the risk. Maybe it's more risky. Maybe we're locking up all of our money. Maybe we're too. Maybe you are with certain alternatives, right? Mm-hmm. But you're not with others. Like what are the mo, you know, not all alternatives are created equal.

In fact, it's really a diversified basket that we would be looking to invest in a portfolio. And the same thing with, with the whole notion of responsible investing, right? And the whole idea of E S G, every manager being the same, right? Or different types of responsible investing being the. Not the case.

Of course, Greg just hit on one, which is a big one. I think in esg, the environmental piece, right? So many colleges and universities have actually restricted fossil fuels from their portfolios. That was a big challenge from a performance standpoint, right? In this time period, uh, specifically as Greg talked about the lopsided returns, but there are other types of responsible investing.

There are other asset classes, they're private investments, right? Things that are gonna act very differently than just that one, you know, that one piece. So I think a lot of the criticism around esg, where we saw stuff in the Wall Street Journal and different papers coming out this year did kinda lump it all into.

Bucket. Right, which didn't to me really tell the full story. I wanna go to this diversity, equity, and inclusion piece because I have heard this quite a bit. From organizations we work with asking about how we look at the managers or the portfolio managers populating the portfolios that we have. We actually have this really diverse group of portfolio managers when we look at a lot of our tax exempt portfolios.

It was, it was a relief, right? That we were like, wow, we're actually well ahead of, uh, the, the marketplace. If you look at who's actually calling the shots and deciding upon the securities in these portfolios. But I think it's really early innings in terms. Measuring this as well. Um, and Beverly, you had some really interesting thoughts on the role that smaller institutions can play when it comes to equity, and I'd love to hear a little bit more about that because Greg, one area where smaller institutions are ahead of their peers is the amount of demand from smaller institu.

For more diverse managers populating their portfolio. Um, so Beverly, I'd love to hear what you think. The role that smaller institutions can play when it comes to equity. 

So the, the experience of 2022 where donor gifts to higher ed, especially to the smaller institutions made up, the difference between the losses on the investment side, to me, demonstrates the power and influence individual donors have to create systemic change through a mixture of traditional investing and philanthropic gifts.

Let's say you. Uh, sort of having a more community social, uh, little activist mindset, you know, in their givings level, the playing field, you know, between the haves and haves nots to kind of create lasting systemic change. 

That's great. I mean, it's an interesting thing. We've had, um, Kristin Carlson Vogan from the Chicago Community Trust on our podcast before, and she's noted this trend that, you know, many givers who are giving to higher ed, for instance, are, are really looking.

For instance, focusing on helping first generation college students, right? Stay in school beyond the first year and really continue on. And so this idea of maybe even partnerships between two year, you know, institutions and four year institutions partnering with donors on, on thinking through that sounds like there could be quite a bit of opportunity.

And really aligning with that trend. Is that what you're seeing? Mm-hmm. 

And that's really in the power of the donors. So some of our donors have scholarships at both levels, like at the community college level, and then at the four year, uh, level. And, you know, Uh, what a great opportunity to increase accessibility of higher ed, right?

Yeah. For, and it's really important for the students to understand that they have that support from the time that they enter college. You know? And if they know, Hey, I could be supported all the way through. My four years. 

That's great. That's so remarkable. So thank you so much Beverly. I think one thing we've uncovered is there is a lot in that NACUBO report to unpack.

Uh, it's not just investment returns, right? There's a lot that can be drawn out and sort of unpacked from that report. So, um, unfortunately this is all we have time for. So Greg, I'm gonna let you have the last word. Any final thoughts you'd like to leave? 

Yeah, thanks Claire. Uh, interestingly, a lot of conversations that we've been having here at Bernstein with our, uh, foundation and nonprofit clients is at the other end of the duration spectrum.

Spending a lot of time talking with them around, you know, how to properly. Think about in size, cash, and operating reserves stuff. The challenge that investors have faced is really what the, how to think about it, how to size it appropriately, and most importantly, what to do, how to invest that. Now that we've had such a significant move up in rates and just given how fluid the situation is, so think of that as something of a plug for reaching out to, um, to their Bernstein advisors and those of us here on the F I A team, we're, uh, we're ready to help.

That's great. Thanks Greg. Um, no shortage of conversations to be had with your investment advisor today. So thank you both so much for joining me today, and thank you all for listening. If you'd like to learn more, please see the link in this episode's description. And if you enjoyed this episode and haven't subscribed to our podcast yet, please go to Spotify or wherever you go to listen to podcasts and subscribe and rate us.

Also, please email us with your thoughts and questions and feed. To insights@bernstein.com and be sure to find us on Twitter at @Bernsteinpwm. Thanks.