Non-profit organizations are reporting their 2012/2013 financial year results. And they make for happier reading than most market commentators would have foreseen: according to a new piece by my colleagues Lila Han and Heather Myers, the median return in the BNY Mellon Total Endowments and Foundations Universe for the year to June 30, 2013 was 12.1%. Not bad.
Despite the non-profit world’s commitment to diversification and alternative strategies, the main driver of the strong 2013 result was the plain old stock market: the Russell Global Index served up 18% (and the U.S. market did even better). Investing is a more rewarding activity in times like this.
The three-year median annualized return was 10.2%, the five-year was 4.2% and the ten-year 7.2%. Again, not bad when you think of just how ugly the 2008 financial crisis was. Most investors who retained a consistent strategy made up all of their 2008/2009 losses within a couple of years.
Yet there’s been talk for years of a low return environment. Was that simply wrong? I don’t think so. One year is not a long time. We are no longer surprised when we see markets move by a percentage point or even two in a single day. So 20% up or down in a year counts as normal equity market volatility. Cutting through the fluctuations to the underlying trend is a subjective exercise, but we get some idea of that underlying trend by looking at interest rates. Interest rates tell you what you can earn before taking risk: before the equity risk premium; before the illiquidity premium; before the beneficial effects of active management and the other sources of return institutional investors seek to harvest.
So even though non-profit organizations tend not to hold a large weight in fixed income securities, interest rates are still the baseline gauge of the underlying return environment. And the ten-year Treasury yield (as of October 22) is just 2.54%, about 1% above its low last summer (the lowest point in decades). At the turn of the millennium, that yield was above 6%. In 1981 it rose above 15%. So, 30 years ago, investors in almost-risk-free securities could get something like 13% a year of return more than they can today.
The past twelve months may have been a good year for most non-profit organizations, and long may the good returns continue, but when you cut through the market fluctuations, we’re still in a low return environment.