Penn's endowment delivered a 'phenomenal return' of 12.9 percent in fiscal year 2018

The University's endowment delivered a "phenomenal return" this year of 12.9 percent, Penn Vice President for Finance and Treasurer MaryFrances McCourt told Penn President Amy Gutmann and the rest of Board of Trustees at its meeting Thursday. This high return, McCourt said, is unique among peer institutions that have not experienced such growth.

The total value of the endowment rose to $13.8 billion, according to data supplied by Bloomberg. This increase came on top of Penn's 14.3 percent return from the previous fiscal year. 

"Especially in this stressed environment for higher education, they're not seeing that across the industry," McCourt said. "So we really stick out."

The Board of Trustees meeting revealed the endowment's distribution: instruction represented 54 percent, financial aid was 22 percent, health care was 16 percent, other academic support was 4 percent, research was 3 percent, and libraries was 1 percent.

McCourt said Penn's undergraduate endowment topped $1 billion this year, which she greeted as "a really great story."

Penn’s returns surpassed the 9.2 percent median return of university endowments larger than $1 billion, according to statistics the Wall Street Journal reported Sept. 28. For comparison, Harvard University gained 10 percent in returns and Dartmouth College gained 12.2 percent.

Massachusetts Institute of Technology, however, outcompetes Penn with a 13.5 percent endowment return.

Wharton professor Robert Stambaugh said even though Penn’s returns dropped from 14.3 percent last year to 12.9 percent this fiscal year, the difference is not significant since there are often year-to-year variations. 

Many of Penn peer institutions’ total investment returns, he added, have declined this fiscal year as well. MIT’s dropped from 14.3 percent last year to 13.5 percent this year, and Dartmouth's to 12.2 percent from 14.6 percent returns last fiscal year. 

Wharton professor Chris Geczy noted it's not as straightforward as it might seem.

"It’s really hard to distinguish 10 percent from 12.9 percent,” statistically, he said.

Stambaugh said it’s difficult to determine how Penn compares to its peer institutions because not all institutions have yet released information on their endowments for the fiscal year 2018. Still, however, he added that he believes Penn is among the universities at the top of the cross-sectional distribution of endowment returns. 

Geczy said that universities’ endowment approaches rely less on fixed income and invest more heavily in hedge funds and venture capital. He said that this approach is responsible for the high returns in recent years as fixed income and bonds have not earned as much. 

Bloomberg reported that investment in private equities this year contributed the most toward Penn’s 12.9 percent returns. MIT also attributed its 13.5 percent gains to private equities and venture capital returns.

Geczy further noted Penn's “substantially diversified portfolio.” A diversified approach, Geczy added, allows Penn to manage the risk of losing its investments, but may not gain as much in returns. 

“My sense is that historically, we have been better diversified than our peer institutions,” Geczy said. 

In her opening presentation to the Trustees, McCourt highlighted a year of "generous" financial aid that improved access and affordability, "excellent" liquidity positions, "strong" investment returns, continued impressive operating performance, and a "record-breaking" year of gifts and alternative revenue sources.

MaryFrances McCourt said Penn enjoyed a "remarkable" 2018 fiscal year.

McCourt said over the past week, Penn had two rating agency meetings with Standard & Poor's and Moody's, who gave them "strong kudos for their performance" over the past year. She added that Standard & Poor's said Penn might be able to earn a triple A credit rating in three more comparable fiscal years due to the positive cashflow from the academic and health systems at the school.

The satisfaction with results was echoed by Trustee and Penn Law professor Osagie Imasogie, who said the reports were "very good news" and commended the committee for its work.

When looking at Penn's financial performance in the 2018 fiscal year, McCourt marveled at the University's success.

"The first thing that came to my mind is: 'Boy is this not a perfect year?'"

Both Geczy and Stambaugh noted that analyzing Penn’s long-run returns may be another indicator of its financial success. 

“Relative to our own [long-run returns] average, it’s been a good year,” Geczy said.