According to the Commonfund Benchmark Study of Educational Endowments (CBS), Benchmark Leaders – endowments placing in the top decile and top quartile of study participants in terms of FY2006 investment returns – reported returns in excess of 16.8% and 14.8%, respectively, up from 16.1% and 13.9% the previous year. Returns reported in the CBS are net of fees.
According to a Commonfund news release on the study results, private institutions reported average returns of 11.2% in FY2006, public institutions as a whole reported returns of 10.1% and independent schools reported the lowest average returns of 9.6%. The 2007 CBS divided public institutions into two groups – public system funds and state institution-related foundations (SIRFs), and found SIRFs posted returns of 10% in FY2006.
Long-term return expectations among CBS participants averaged 8.2% for FY2006, up from 8% the previous year, the news release said. More than 30% of the largest institutions reported return expectations over 9%, and more than 80% of institutions with assets between $501 million to $1 billion reported return expectations exceeding 8%.
Increasing Alternative Strategies Allocation
Alternative strategies allocations rose for sixth consecutive year, while allocations to domestic equity and fixed income showed slight declines, Commonfund said. Overall allocations in FY2006 for all CBS respondents were:
- domestic equity – 26% vs. 28% the previous year,
- fixed income – 13% vs. 16%,
- international equity – 20% vs. 18%,
- alternative strategies – 39% vs. 35%, and
- cash/short term – 2% vs. 3%.
Overall returns for alternative strategies averaged 14.6%, led by energy & natural resources with 39.9%, distressed debt with 26.2%, public equity real estate with 19.1%, private equity with 18.9% and private equity real estate with 15.5%, the news release said. Hedge fund returns averaged 10.6%. Allocations to alternative strategies correlated closely with the size of institution funds – a finding Commonfund said helps explain why returns and endowment size are correlated.
Respondents also increased allocations to international equities, which was the highest performing traditional asset class for the year with an average return of 24.7%. Top decile performers allocated 36% of international equity assets to emerging markets, compared to 27% for all institutions. Within international equity for all respondents, active MSCI ex-U.S. was 68% of assets, and passive/index MSCI ex-U.S. was 5% of assets.
Within fixed income, domestic holdings were 79% active strategies and 11% passive. International bonds represented 10% of fixed income assets for all participants.
Benchmark Leaders reduced domestic fixed income allocations to 11% from 15% the previous year. According to Commonfund, an analysis of the Benchmark Leaders, including top decile (68) institutions and top quartile (180) institutions, revealed their higher returns were due to significant differences in their size, use of best practices, and alternative strategies allocations in FY2006 compared with total institutions. Benchmark Leaders are mostly large institutions that have better access to select alternatives managers who consistently deliver the best returns, but are often closed to new investment. They also generally have larger staffs, greater resources, and more experienced investment committees, and show a greater degree of diversification in alternatives than smaller endowments.
Twenty-three percent of total institutions expect to decrease domestic equity allocations and 13% plan cuts in fixed income in FY2007, while 27% of respondents expect to increase allocations to alternative strategies.
While the CBS found gifts to endowments declined in dollar terms from FY2005 to FY2006, approximately 6.2% of the growth in respondents' total assets was due to gifts.
Total average gifts to endowments declined to $7.3 million in FY2006 from $7.9 million the previous year despite a year-to-year increase in average total gifts among smaller institutions. Overall, gifts in FY2006 accounted for a bigger portion of endowment growth for smaller institutions than for larger institutions. The percentage of participants' operating budgets funded by annual giving declined to an average 7.1% versus 7.5% in FY2005. The typical institution with more than $1 billion in assets received more than $60 million in gifts.
The CBS also found that spending rates declined among endowments and foundations in FY2006, and a smaller percentage of institutions reported an increased debt from the previous year.
Commonfund polled 741 private college and university endowments, independent school endowments, public system funds and state institution-related foundations (SIRFs) for the CBS in the third and fourth quarters of 2006. For more than 80% of the respondents the fiscal year 2006 ended on June 30.
Commonfund can be found on the Web at www.commonfund.org .
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