Amherst’s endowment plays a pivotal role for the College across a broad spectrum of initiatives, providing 51 percent of revenue in Fiscal Year 2016 (FY16). Withdrawals from the endowment funded approximately 30 percent of Amherst’s operating budget 10 years ago, and FY16 marks the first time in the College’s history that the endowment has contributed more than half of the operating budget. When the fiscal year ended on June 30, 2016, the endowment had a market value of $2.032 billion (compared to $2.194 billion on June 30, 2015—a decrease of $162 million). The return on the College’s investments was -3.5 percent, net of investment management fees and related expenses. FY16 marked the first negative fiscal year investment return for the College since the global financial crisis (FY09). Gifts of $9.2 million and another $1 .5 million in transfers to the endowment from terminated life-income funds also contributed to the College’s endowment for the year.
The Folger Shakespeare Memorial Library’s Endowment Fund decreased from $328.8 million to $303 2 million during the fiscal year. Funds managed by the trustees under life-income agreements totaled $77.4 million as of June 30, 2016, showing a net decrease of $10.5 million from the prior year.
A summary of the Amherst endowment’s growth over the past two decades is shown below:
FISCAL YEAR 2016 MARKETS AND RETURNS
Perhaps fittingly, FY16 ended with the announcement that the United Kingdom had voted to leave the European Union. The historic “Brexit” vote, which took place during the last week of June, was the culmination of a year that saw a growing populist trend around the globe. Political uncertainty, particularly within the United States, has served to fuel global market volatility. Monetary policies are being pushed to extremes in many countries; U.S. bond yields are at record lows, even after the first Fed rate hike in 10 years; and negative bond yields are becoming commonplace (as in Japan, Germany and Switzerland). China, which had been the engine of global growth, is now adjusting to its own slower growth outlook. Commodity prices, while slightly up from historic lows, continue to be depressed. Currency volatility has hit record levels in many countries, spawned by a strengthening U.S. dollar. While the U.S. equity market generated its lowest fiscal-year return since 2009 (the S&P 500 Index returned 4.0 percent for the fiscal year), it still outperformed nearly all other international equity markets. Notably, the United Kingdom declined 12.1 percent over the fiscal year; Japan declined 8.9 percent; and Europe, excluding the UK, dropped 10.8 percent. Emerging markets also had a challenging year, with China declining 23.2 percent, in turn fueling a broader decline of 11.7 percent for the MSCI Emerging Markets Index.
Continued record low interest rates, including an increasing number of negative interest rate securities, helped bonds produce strong returns for the fiscal year. The Citigroup World Government Bond Index and the U.S. 10-year Treasuries both produced double-digit returns for the fiscal year, returning 11.3 percent and 10.1 percent respectively. The few other standouts in FY16 for market performance included REITs (the FTSE NAREIT All Equity REITs Index returned 23.6 percent) and gold (returned 13.0 percent). While oil prices recovered from their recent lows in February, the Bloomberg Commodity Index Total Return declined 13.3 percent for the year.
The College’s -3.5 percent return for the fiscal year trailed its strategic policy benchmark, which rose 0 .8 percent for the period. The College’s return also lagged behind the 60 percent S&P 500 Index/40 percent Bloomberg Barclays U.S. Aggregate Bond Index blended return of 5.0 percent. Disappointedly, the College’s FY16 return ranked below the median of the Cambridge Associates performance universe for college and university endowments. However, longer-term results remain quite strong, with the College’s 10-, 15- and 20-year annualized returns standing at 6.7 percent, 8.4 percent and 10.7 percent, respectively. These returns rank in the top decile of returns for U.S. college and university endowments.
Clearly FY16 was an extremely difficult performance year, and represented a detrimental “perfect storm” for the Amherst portfolio; diversification hurt rather than helped returns, and the endowment portfolio was underallocated to the best-performing segments of the market, U.S. Stocks and Bonds. Additionally, the College’s managers within those asset segments underperformed the market fairly significantly. A combination of these negative contributions from asset allocation and manager selection hurt short-term returns. While a one-year return can be impactful, whether positive or negative, we tend to focus our strategy and our energy on achieving consistent long-term returns, and our diversified portfolio and disciplined investment approach has served Amherst well. Anecdotally, the trailing 12-month performance ending Sept. 30, 2016, was 6.0 percent, a full 9.5 percent higher than the trailing 12-month performance just a quarter earlier. This is a convenient and tangible reminder of the perils of focusing on such a short-term investment period.
Over the past 20 years, by investing along-side well-aligned investment managers, across a variety of asset classes and markets, the College has cumulatively added roughly $1 billion in value to the endowment—relative to a passive benchmark of 60 percent S&P 500 Index and 40 percent Bloomberg Barclays Aggregate Bond Index—as shown in the chart below:
POLICY PORTFOLIO AND INVESTMENT STRATEGY
The portfolio continues to be invested across a diverse set of asset classes, strategies, geographies and managers. The strategic policy portfolio, established by the Amherst College Investment Committee, guides overall asset allocation and liquidity. The Investment Committee continues to define the strategic policy portfolio across four broad asset categories: Global Equities, Absolute Return, Real Assets and Fixed Income & Cash. The Investment Committee and Office of Investments staff regularly review the expectations upon which the strategic policy portfolio is based and, within each of these broader categories, will refine the allocation to various sub-asset classes—for example, public versus private and developed versus developing markets—with the goal of improving the portfolio’s risk/return characteristics. FY16 marked an unusual period, where investment portfolios that had significant equity exposures outside the U.S., and/or had below-average exposure to U.S. fixed income, were likely destined to see disappointing returns.
In addition to broadly diversifying the investments across asset classes, the Investment Committee and Office of Investments staff aim to maintain sufficient exposure to liquid investments to satisfy the endowment’s growing financial support of the College’s operations, and to provide the portfolio liquidity needed to meet its private capital obligations and the nimbleness to take advantage of market opportunities. To this end, nearly 50 percent of the portfolio is fully convertible to cash in under a year, and almost 20 percent is convertible in less than 30 days.
The College continues to maintain a strategic underweight to dedicated Fixed Income strategies, given their continued low yields, and has increased its exposure in Absolute Return strategies, funding managers who have the ability to invest across asset classes and security types, as can be seen in the table below:
In February 2015, the Board of Trustees issued a statement defining environmental sustainability as a fundamental College objective. The Office of Investments and Investment Committee pledged to achieve this goal through a process of ongoing inquiry, analysis and engagement with our managers on issues related to environmental sustainability, rather than systematically excluding direct investments in certain companies, industries or sectors. As a part of this effort, the College reached out to each of its investment managers, asking that they consider carefully the financial risks and impact of climate change when evaluating potential investments. The majority of managers affirmatively indicated that they take these risks into consideration when evaluating prospective investments. In addition, the College continues to proactively evaluate and vote its shareholder proxies in alignment with ESG (Environmental, Social and Governance) principles, advocating for corporate accountability with respect to social, ethical, environmental and governance issues. The Office of Investments has partnered with Ceres, a nonprofit organization that advocates for sustainability leadership. Through membership in Ceres’ Investor Network on Climate Risk, Amherst College is able to advocate for, and participate in, various initiatives on environmental sustainability and efforts that will lead to a reduction of greenhouse gas emissions. In addition, the Office of Investments continues to proactively evaluate investment strategies and opportunities that clearly incorporate sustainability as a part of their core focus.
While FY16 was disappointing on both an absolute and a relative basis, we remain disciplined and focused on the long-term-return objective. The Investment Committee and Office of Investments staff remain committed to a diversified investment approach across a broad spectrum of asset classes and geographies. While there will be periods, such as FY16, when this approach may fall out of favor, we remain confident that, over longer market cycles, the College will be rewarded.
The Investment Committee, along with the Office of Investments staff, understands the need to be strong stewards of the College’s endowment on behalf of the thousands of alumni who have helped to grow this tremendous resource for the College. Our focus remains on positioning the endowment to take advantage of market opportunities, without taking excess risk, as we strive to protect and strengthen the resources provided by all the generous donors to the College endowment.
Chief Investment Officer