Institutional investors optimistic about 2014

Updated March 21, 2014.

Endowments nationwide are predicted to grow around seven percent in fiscal 2014.

Several hundred nonprofit institutional investors predicted their portfolios to grow by an average of 7.3 percent in fiscal 2014, down from 7.6 percent in fiscal 2013, according to a Commonfund Investor Outlook survey released this week. Over five years, university endowments, pension funds and public charities are anticipated to grow by an average of 7.7 percent.

“The data indicates a level of realistic optimism that’s both refreshing and important,” Verne Sedlacek, President and CEO of Commonfund, said in the report.

According to the press release, market volatility remains the primary concern of institutional investors. The predictions acknowledge the “strong headwinds that are present,” including tough economic conditions in Europe and the possibility of rising inflation, said Commonfund Institute Executive Director John S. Griswold.

While the average college endowment grew by 11.7 percent in fiscal 2013, he said that managers are not expecting that level of growth to continue. Griswold added that high single-digit returns are not disappointing, but said that a seven percent growth rate is probably insufficient to recover spending from the endowment and long-term inflation.

“There’s a need to bolster endowments longer term,” he said. “This isn’t disappointing, but realistically it’s not quite enough to cover your spending plus inflation.”

Griswold said that a seven percent return will cover most of the needs of higher education institutions, but emphasized the importance of fundraising during this time.

Still, because predicted growth between fiscal 2013 and fiscal 2014 shifted by only 0.3 percent, the data is unsurprising, said William Jarvis ’77, managing director of the Commonfund Institute.

According to Massachusetts Institute of Technology professor Jonathan Parker ’88, the risk-free nominal rate of return over five years is about 1.5 percent per year. By predicting a much higher return, institutions are therefore incorporating greater risk into their portfolios. Increased risk could cause deviation from the 7 percent prediction, he said.

In a 24-page document released last month, the Yale Investments Office said its risk-adjusted growth rate remains strong.

“Performance over longer horizons demonstrates the strength of Yale’s investment program,” the report said. “Although the endowment produced painful losses in fiscal 2009, the results of any one-year period tell very little about the efficacy of a long-term investment strategy.”

David Swensen is the University’s Chief Investment Officer.

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