Ed. Endowment 2005 Returns Lower but Still Respectable

January 12, 2006 (PLANSPONSOR.com) - The 2005 return by US educational endowments was down significantly from the year before, but still represented a respectable showing, according to new data.

A news release said that the latest Commonfund Benchmarks Study on private college and university endowments, public educational endowments, independent school endowments, and private foundations found an average annual total return of 9.7% in FY 2005.

This follows 2004 average annual total returns of 14.7% and 3.1% for FY 2003, according to the Commonfund data. Public and private institutions reported average returns of 10.4% and 10%, respectively.

Larger institutions (assets over $1 billion) reported significantly higher three- and five-year returns (11.6% and 5.1%) than the smallest institutions with under $10 million in assets (9.5% and 3.3%), the data showed.

“Most endowments and foundations are using alternative investments to a greater extent, as well as active asset allocation, diversification and risk management to maximize both returns and intergenerational equity, particularly the Benchmark Leaders,” said John Griswold, executive director of the Commonfund Institute, in the release . “This year’s study shows that Benchmarks Leaders achieved significantly higher returns by increasing allocations to alternative strategies and reducing allocations to domestic equity in the past year. This indicates institutions’ greater need for special expertise in due diligence, risk management and proper diversification of an alternatives portfolio.”

In the area of asset allocation, average allocations showed slight changes in FY 2005 from FY 2004. Overall allocations in FY 2005 were: domestic equity (28% vs. 31% the previous year), fixed income (16% vs. 15%), international equity (18% vs. 16%), alternative strategies (35% vs. 34%) and cash/short term (3% vs. 4%).  


The latest data reported very modest changes within domestic equity holdings in FY 2005, increasing large cap (49% vs. 48%) and reducing mid cap (12% vs. 13%), while small cap remained stable at 19% and indexed equities (passive/enhanced) remained unchanged at 20%. Within fixed income, the latest data reflected increased domestic bonds (81% vs. 77%), reduced high yield bond allocations (10% vs. 14%) and made modest changes to global bonds (3% vs. 4%) and international bonds (6% vs. 5%).

Little change was reported within international equity allocations, with active and passive MSCI declining (66% vs. 69% the previous year and 5% vs. 6%, respectively) and emerging markets increasing (29% vs. 25%). Alternative strategies asset mix was similarly stable, with private equity unchanged at 14%; hedge funds down modestly to 47% vs. 48%; venture capital down modestly to 7% vs. 9%; and public equity real estate down to 3%.vs. 4% There were slight increases in private equity real estate (12% vs. 11%), energy and natural resources (13% vs. 11%) and distressed debt (4% vs. 3%).

Asked about expected changes to asset allocation in FY 2006, 32% of funds in the latest study report they anticipate increasing their alternative strategies allocations, 24% expect to decrease domestic equity allocations, and 16% expect to decrease cash and short term allocations. Few expect to make any change to fixed income allocations. International equities expectations were split, with 14% anticipating a decrease, and 10% an increase.

Interviews for the 2006 Commonfund Benchmarks Study were conducted during the third and fourth quarters of 2005, and reflect responses of 729 institutions for fiscal year 2005. For more than 80% of the study participants, this fiscal year ended on June 30.