Endowments Hope Another June Black Swan Won't Spoil Strong Year

(Bloomberg) -- In 2015, it was the Greek debt crisis. Last year, Brexit.

No news will be good news for many endowments -- at least for the next two weeks -- as they seek to avoid a seismic geopolitical event that wipes out their better-than-average returns before the end of the fiscal year on June 30. The S&P 500 Index is up 8.7 percent so far in 2017 and, other than raising cash or paring stocks, endowments are mostly waiting and hoping it stays that way.

“We’re holding our breath,” said Jerome Dvorak, executive director of the Bloomsburg University Foundation, which oversees almost $40 million for the Pennsylvania public school.

Returns are looking vastly better than the previous year, when U.S. college funds, which collectively hold about $500 billion, had average investment losses of about 2 percent. Now they’re on track for gains in the high single digits, the best performance since fiscal 2014. 

Endowments Hope Another June Black Swan Won't Spoil Strong Year

The average 10-year return for college funds is 5 percent.

Bloomsburg forecasts returns of 8 percent to 10 percent for the fiscal year, with the domestic portfolio up almost 20 percent through April. Equities make up about 65 percent of the portfolio, with more than half of that in U.S. stocks. The rest is mainly bonds.

“It may not look sexy, but it’s working,” Dvorak said.

Three decades ago, many college funds had a 60/40 allocation of stocks to bonds. Today, the smallest endowments hew more closely to that mix while larger peers invest heavily in private equity and hedge funds. At the end of the last fiscal year, funds with less than $25 million had 44 percent of their portfolios in U.S. equities, versus just 13 percent for endowments of more than $1 billion, according to money manager Commonfund and the National Association of College and University Business Officers. Domestic stocks comprise just 4 percent of Yale University’s $25.4 billion fund.

Stock Swoons

Wake Forest University, with about 18 percent in U.S. equities, expects returns of as much as 11 percent this year, said Jim Dunn, who oversees the $1.1 billion endowment as chief executive officer of Verger Capital Management.

Barring another black swan event, of course.

Last year, U.K. voters defied the polls, opting to quit the European Union after more than four decades and shocking global markets. The S&P 500 Index, which had been up 0.8 percent that month, tumbled 3.6 percent on June 24, the most in 10 months. The benchmark still eked out a gain of less than 0.1 percent, but the damage had been done.

In June 2015, Greece’s banks and stock market were closed with the economy sliding back into recession and the country on the brink of being booted from the euro zone. The S&P 500 tumbled 2.1 percent that month.

Holding Breath

With about two weeks to go before the end of the fiscal year, endowment chiefs are hoping things stay quiet in the world’s hot spots, from the Korean and Crimean peninsulas to the Middle East, and some have been content to lock in gains.

“Valuations are at the second highest they have ever been in history of equity markets,” said Dunn, who’s been a seller of U.S. stocks and helped make Wake Forest’s endowment one of the few to book positive returns in fiscal 2016. “It’s like a battleship: You can’t turn it and you can’t stop it,” he said. “For a lot of smaller endowments, they hold their breath and wait.”

Utah Valley University, with a fund of about $46 million, sold roughly 10 percent of its U.S. equities in the current fiscal year, opting for a local real estate deal and international stocks. 

“We made those tactical shifts because we are concerned we will see some correction,” said Jefferson Moss, executive director of the school’s foundation.

It now holds more than one-third in U.S stocks. The portfolio had gained almost 10 percent through March, and that’s how Moss expects it to end the year.

Lasting Mark

The University of Cincinnati, which oversees almost $1 billion of its $1.2 billion fund, forecasts a year-end gain of 11 percent to 13 percent, said chief investment officer Karl Scheer.

“It’s unexpected and wonderful news to see a double-digit number,” he said, adding that all the asset classes are producing gains except for fixed income.  

The school plans to invest more in private equity, probably in the 2018-19 school year, he said. Those commitments need to be in place when a crisis hits because “managers’ investment pace slows dramatically and the fund cycle therefore gets delayed,” Scheer said.

While no one likes to focus on short-term results -- and what happens in the next two weeks “doesn’t matter at all” in the long run -- it’s unavoidable, he said.

“The fiscal year-end number hangs around for a long time.”