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Allocating assets, part 1 – Endowments eye stability

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[Editor’s note: This is the first of six articles examining endowment strategies by charitable organizations.]

By Todd Cohen

The stumbling economy is fueling a quest for stability at endowments, which are taking a hard look at how they build and invest their assets.

If they haven’t already, endowment officials are assessing investment strategies, shifting assets to investments they believe will be less volatile and encouraging donors to consider alternative gifts such as real estate or art.

“It makes sense to have as many things in your portfolio that perform differently in different environments to protect you so you can weather different economic periods,” says Stephanie Lynch, chief investment officer for The Duke Endowment in Charlotte, N.C.

Endowment assets, which soared during the late 1990s stock market boom, have taken big hits in the past year or so as markets plunged, eroding earlier paper gains.

College and university endowments, for example, posted an average return of negative 3.6 percent in the fiscal year ended June 30, 2001, the first negative return since 1984, according to the National Association of College and University Business Officers in Washington, D.C.

“For fiscal year 2002, it’s safe to assume that the rates of return will be similar, certainly negative,” says Damon Manetta, NACUBO’s manager for external affairs and media relations.

As of June 30, 2002, returns had fallen 5.4 percent for endowments at roughly 100 colleges, universities and independent schools, compared to a year earlier, according to a survey by the Commonfund Institute in Wilton, Conn.

And the quarter ended Sept. 30 likely was “one of the toughest in many years,” possibly doubling the decline of the 12 months ended June 30, says John Griswold, the research group’s executive director.

In fiscal 2001, the average return on endowments of 617 foundations and educational institutions tracked by Commonfund fell to negative 3 percent from 13.2 percent a year earlier, he says.

“Since March 2000, when the market peaked, you’ve seen some vicious declines,” he says.

At U.S. community foundations, the median return on assets fell to negative 3.9 percent in 2001, the lowest annual return since 1992, when the Council on Foundations in Washington, D.C., began tracking community foundations’ investment performance.

Divvying up endowment assets among different types of investments is one of the most critical jobs facing board members in their fiduciary role, the Council on Foundations says in the most recent edition of its Foundation Management Series.

Asset-mix decisions can affect up to 90 percent of a fund’s relative performance, it says, and “can have a much greater impact on the foundation’s long-term financial position than the performance of its individual investment managers.”

Domestic and international stock accounted for more than more than 60 percent of the total portfolios of all grantmakers in the council’s most recent survey, which reflected holdings on Dec. 31, 1999, while fixed-income investments accounted for more than 24 percent.

Family and independent foundations typically hold more of their portfolio in stocks, while community and public foundations typically hold less in stocks, the council says, and all grantmakers were allocating more to stock and less to cash and fixed-income than they were in 1997.

“We’re seeing a decline overall in equities and a rise in alternatives, including private equity, hedge funds and real estate,” says Griswold.

Equities, which represented roughly 65 percent of investments several years ago, generally have declined to 55 percent to 60 percent, he says.

“People aren’t trusting the stock market now,” he says, “so they’re letting their investment in the stock decline relative to other asset classes.”

NEXT: Colleges and universities shift endowment assets.

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