Top Performing Endowments Hold Much in Alternative Investments

January 17, 2008 ( - The average annual total return earned by the 767 U.S. institutions participating in the Commonfund Benchmarks Study of Educational Endowments was 16.9% (net of fees), up from 10.6% in last year's study.

According to a report on Commonfund’s findings, this was the highest annual return in the eight years that the study has been conducted. Average three-year returns rose to 12.8% from 12.3% a year ago, while average five-year returns jumped to 11.5% from 6.8% last year.

Performance by individual asset classes was led by international equities with an average return of 28.3%, followed by domestic equities (19.5%), alternative strategies (16.8%), short-term securities and cash (6.5%), and fixed income (5.9%).

Within alternative strategies, private equity (including LBOs, mezzanine and M&A funds, and international private equity) returns were 19.3%. Energy/natural resources, commodities, and managed futures returned 18.8%, while private equity real estate (non-campus) posted an 18.7% return. Distressed debt returned 16.9% and venture capital, 13.8%.

Top decile institutions in the study returned an average of 22.6%, while Top Quartile institutions returned an average of 20.8% – up from 16.8% and 14.8% in last year’s study, respectively. According to the Commonfund report, the fact that many of the most successful endowments are large endowments (with assets over $1 billion) points to the considerable advantages that size offers, such as the ability of large endowments to gain access to top managers and manage large and well diversified allocations to alternative asset classes.

Top Decile institutions allocated 52% of their endowment assets to alternative strategies. For the top quartile, the allocation was 47%. This compares with a 42% allocation to alternative strategies for the study population overall.

The Benchmarks Leaders have smaller allocations to domestic equities and fixed income securities, and are roughly even with the entire study population in their international equities allocation, the report said. Benchmarks Leaders also kept cash to a minimum – 1% versus 3% for the overall study group.

There was a noticeable reduction in allocations to energy and natural resources among the Top Decile, while there was a significant increase in the private equity allocation of both Benchmarks Leaders and the Study universe.

The 42% allocation to alternative strategies for the study population was an increase from 39% last year. Overall, the study population had 3% in short-term securities and cash compared with 2% a year ago. Domestic equities held 23% of assets, down from 26%, while the international equities allocation was unchanged at 20%, and fixed income held 12% of assets – down from 13%.

Large endowments with assets in excess of $1 billion allocated the most to alternative strategies – an average of 47% – and the smallest institutions (those with assets under $10 million) allocated the least at 7%. Larger endowments also had bigger allocations to international equities, while smaller institutions had the largest allocations to traditional domestic equities and fixed income, as well as to short-term securities and cash.

Half of study participants reported an increase in gifts and donations, up from 46% in last year's study. Twenty-seven percent reported decreased gifts, and 19% reported no change.

In dollar terms, the average amount of new gifts to endowment for all participants was $8 million, up from $7.2 million last year - a gain driven by gifts to endowments with assets over $1 billion ($66.5 million from $61.1 million a year ago).

The average size of the investment committee among participating endowments has decreased somewhat to 7.6 voting members from 7.8 last year and 8.2 members in both FY2005 and FY2004.

Endowments report that the cost of managing their funds has continued to increase, rising to an average just below $2.30 million for all institutions from $1.98 million in FY2006 and $1.62 million in FY2005. This reflects the higher management and incentive fees associated with larger allocations to alternative assets and international equities, Commonfund said.

Returns and all other data in the study were for the 12-month period between July 1, 2006, and June 30, 2007.

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