U.S. Endowments Endow Faith in Alts, Equities Prevail, However
While nearly half of the endowments situated in the U.S. are still trying to regain ground lost following the financial collapse, emerging market debt and other fixed-income strategies remain a minuscule part of the investment conversation.
At a press briefing yesterday, National Association of College and University Business Officers (NACUBO) President and CEO John Walda said approximately 47% of the U.S. colleges and universities’ endowments included in its newly released study were still below their prior asset levels.
For the fiscal year, which enveloped the period between July 1, 2010 and June 30, 2011, the 823 institutions included hit an average 19.2% return net of fees, indicating a 11.9% improvement in returns from the prior year, this according to the third annual joint NACUBO and Wilton, Conn.-based Commonfund’s study.
“…Even though we had a really great year, many of our institutions are still not a point where they’ve recovered, in terms of value, from the recession,” Walda said. “47% of the institutions participating in both 2009 and 2011” are still below.
This list includes about 755 schools, Walda said.
Preliminary numbers issued in November 2011 listed the nearly 284 sample returned 19.8% for the period. The official 2011 NACUBO-Commonfund Study of Endowments (NCSE) released today showed that of the total endowment market assets, approximately $408.1 billion, only held 10% of their portfolios to fixed-income.
Across the board, from institutions over $1 billion to those under $25 million, there has been a slight dip in commitments to bond strategies.
The fixed-income asset class reported a 6.6% return for the period, indicating a 5.6 percentage drop from 2010’s numbers, the NCSE study stated.
When asked if emerging market debt and other alternating debt strategies were apart of the endowment universe, Commonfund President and CEO Verne Sedlacek explained there has been a move “towards more conservative investing” over the last five years.
“I know a lot of institutions are not pushing the envelope to sovereign debt outside the U.S., particularly,” he said. “U.S. endowments have done a very good job at staying away from that challenging area.”
However, there has been a push for “…more sovereign, U.S., Treasury debt, a move towards high-grade corporates, and away from less highly rated entities,” the institutional investment firm’s leader listed.
“I think a lot of people [institutions] went through the 2008 period and underperformed substantially because credit didn’t do as well as U.S. sovereigns,” Sedlacek noted Monday morning. “So I think we’ve seen a move from more high grade corporates relative to what we saw…and certainly anything that has any mortgage basis is pretty much off the table these days.”
William Jarvis, who is a managing director at the Commonfund Institute, the firm’s education and research arm, added the “move to higher grade international, domestic grade corporate debt” was something seen at larger endowments.
“…But emerging market bonds remain at the lower level, at about 2% of the fixed-income , which is only a third of the total allocation” in some cases, Jarvis said.
Last year, it was reported that smaller funds beat out their larger counterparts in 2009 due to their commitments to fixed-income. However, in January 2011, the study noted that “the prior “anomalous” results of smaller institutions outperforming larger, and fixed-income and short-term securities topping out equity-based investments returned back to normal in 2010.
In terms of other notable findings, bigger funds had committed roughly 60% of their assets to alternatives, bringing the total average for the allocation to 53%. International equities and domestic equities were next in line in terms of commitments with their 17% and 16% average weighting.
For 2011, domestic equities, while lagging slight behind the S&P, posted a 30.1% return and international stocks reached a 27.2% return. Alternative, however, hit about 14.1%, with commodities and managed futures topping off as the best bets for the risky asset class, the report listed.
Other study highlights zeroed in on the fact that funds below the $25 million threshold were holding 10% of their assets in cash and short-term securities.
“…We all know what cash is returning these days, if it isn’t zero it is very close to zero,” Sedlacek commented Jan. 30. “…It’s going to be a drag on those endowments. So having 10% allocation is something that’s on the high side and it really shows concern over the volatility of markets we see today and concern about liquidity.”
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