By Ret Boney
Earnings for higher-education endowments in the U.S. grew last year, fueled in part by investments in international stocks and participation in a broad array of non-traditional options, a new study says.
Overall, the average return for the 741 institutions analyzed in the Commonfund Benchmarks Study of Educational Endowments was 10.6 in 2006, up from 9.7 percent the previous year.
That increase is due to a stronger reliance on international equities and diversification within alternative investment strategies, the study says, at the expense of domestic equities and fixed-income options.
Dividing all higher-education endowments into 10 evenly-divided groups, members of the best-performing group — which tends to consist of larger endowments — saw their average return increase to more than 16.8 percent last year, compared to 14.8 percent the previous year.
Private institutions, which typically have larger endowments, led the pack, with an average return of 11.2 percent, followed by public institutions, at 10.1 percent, and independent school, with 9.6 percent.
Across all categories, large institutions performed better than small, the study says, due in large part to larger staffs, use of best practices, better access to alternative investment funds and a greater diversification within alternative investments.
“The difference when you’re small is resources, both board and staff,” says John Griswold, executive director of the Commonfund Institute. “And you may not be large enough to qualify as an investor for many alternative funds.”
There are more and more vehicles available for smaller groups to access interesting vehicles, says Griswold, but notes that must be done carefully, with an eye on risk.
“If you’re going to outsource, don’t think you can outsource your fiduciary responsibility,” he says.
For institutions with assets between $500 million and $1 billion, 79.1 percent of their endowment growth was due to alternative investments, compared to 75 percent for groups with assets of more than $1 billion and 71 percent for smaller groups.
Reliance on domestic equities dropped to 26 percent from 28 percent of the overall asset allocation, the study says, with fixed income dropping to 13 percent from 16 percent.
Picking up the slack were international equities, where the average allocation grew to 20 percent from 18 percent, and alternative strategies, which received 39 percent of allocations, compared to 35 percent the year prior.
Overall, alternative strategies yielded a 14.6 percent return, the study says, led by 39.9 percent for energy and natural resources investments and 19.1 percent for public equity real estate.
Among the traditional assets, international equities showed the best performance, with a return of 24.7 percent.
Most of the participating institutions say they do not plan to alter their allocation strategy significantly next year, the study says.
For the fifth year in a row, the average spending rate for educational endowments fell, dropping to 4.5 percent from 4.6 percent, thanks to improved returns and market values.
Among the groups that reported increases in funds available for spending, the average jump was almost 13 percent, the study says, and two in three groups reported growth in their operating budgets.
About 6.2 percent of the overall growth in assets was due to gifts, up from 5.4 percent in 2005, the study says, but the total average gifts dropped to $7.3 million from $7.9 million, with gifts of $60 million for the average group with assets over $1 billion.
Three in 10 institutions surveyed say their debt level grew in 2006, down from one in three in 2005, the study says, but the average level of debt grew to $87.1 million from $79.8 million in 2005.