The Commonfund Benchmarks Study also found that, on average, endowments posted positive returns during fiscal year 2000, despite adverse market conditions that hurt many pension funds.
The study further asked respondents to name their primary concerns regarding their endowments over the next year and found that most harbor concerns in three main areas:
- diversification and rebalancing in a ever-changing market
- the impact of returns on spending policies, and
- communication with their boards.
On the first issue, involving asset allocation, managers expressed concerns about their efforts to diversify, saying that they need to bring their boards “up to speed on some investment alternatives” and determining their “alternative strategy and venture capital strategy.” Others mentioned:
- moving out of cash positions and allocating more funds to equities
- fears that investments are too conservative
- lowering their return expectations
- concerns over the economy, political risk and the oil price.
Given the decade-long bull market, endowments have been
accustomed to wide spending margins. Now that markets have
turned, many question their ability to fund scholarship
programs, maintain capital and fund the operating budget.
Responses in this category include concerns over:
- preserving buying power in a volatile market, and
- keeping spending policies below the earnings of investments
The study of 563 institutions, which focused on educational endowment and operating funds management, found that the endowment assets are distributed in the following ways:
- some 56% are in true or permanent endowment, in funds that are restricted as to the use of principal or income, or both. Funds dedicated to scholarships or faculty support are the most common types of restricted endowment,
- only 8% are in term endowments, these are restricted for a period of time, after which any remaining unused funds my become unrestricted, and
- the remainder, 36%, are in quasi-endowments. These are unrestricted funds functioning as endowments by vote of the board of trustees. Although these funds are distinct from the operating cash and reserves of the institution – they can be spent, by vote of the board, for any purpose.
The endowments of the institutions surveyed returned an average total return of 13.2% for the fiscal year 2000:
- endowments of $1 billion or more returned 23.9% for the same period,
- while those of $101 – $500 million returned 14.8%, and
- those with under $10 million returned 9.9%
The survey found that institutions had an average spending rate of 5% in 2000 – only slightly higher than the 4.9% spending rate of the last five years. The survey notes that holding spending to around 5% may be emerging as a best practice.
- private foundations and private endowment funds, at 5.2% spent at the highest rate relative to the average,
- while independent school endowments spent at the lowest, at 4.5%
While 62% the portfolio assets of the institutions surveyed are in traditional investments such as domestic equity and fixed income, 23% of portfolio assets are now allocated to alternative investments, according to survey data.
And schools of different sizes invest differently, with larger schools placing a greater share of their portfolio into alternative investments:
- endowments under $10 million had only 5% of their assets alternative investments,
- for those with between $101 million and half a billion dollars, 15% was exposed to alternative investments,
- while for endowments over $1 billion, 29% was allocated to alternative investments
Within alternative investments,
- allocations are highest to hedge funds, at 28%
- followed by venture capital at 24%, and
- private equity at 22%
Within asset classes, the survey found that
- almost a quarter of domestic equity allocations are largely in active core equity funds,
- with 17% in large cap value funds,
- and the same percentage in large cap growth
In terms of international equity allocations,
- over three-quarters are invested in EAFE holdings, and
- a little over 20% in emerging markets
When asked about the criteria used in selecting managers, the sample rated four criteria as most important or very important to them. These were:
- capabilities of the manager in managing investments,
- stability of the firm’s management,
- clear and consistent investment philosophy, and
- credibility with the funds trustees.
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