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Returns, spending up at higher-ed endowments

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By Elizabeth Floyd

Investment returns for higher-education endowments surged in 2007, and most institutions increased their spending, two studies say.

Returns averaged 16.9 percent, up from 10.6 percent in 2006, at endowments surveyed by the Commonfund Institute in Wilson, Conn.

Returns measured by a second study, by the National Association of College and University Business Officers and TIAA-CREF Asset Management, averaged 17.2 percent, the highest since 1998.

Based on the returns of recent years, the studies say, endowments have increased some of their spending.

The annual Commonfund Benchmarks Study says that while the average spending rate at university endowments fell slightly, it grew at 73 percent of institutions surveyed.

NACUBO’s study says endowment performance is helping to fund more student aid.

Annual spending on student grants has grown 6.4 percent on average above inflation, must faster than average annual tuition increases that range from below 3 percent to four percent .

Congress has been pressuring colleges and universities with large endowments to increase their pay-outs.

Harvard, Duke, and Yale, for example, have recently enhanced their student-aid packages.

Endowments grew to all-time highs in 2007, with 76 valued at more than $1 billion, NACUBO says.

The larger the endowment, the greater the return, the study says.

Endowments over $1 billion posted returns averaging 21.3 percent, for example, compared to 14.1 percent for endowments of $25 million or less.

Bigger endowments also can more easily take advantage of alternative investments like hedge funds or natural resources, Commonfund says.

Endowments that posted the biggest returns, a group with many of the big endowments, allocated 52 percent of their assets to alternative investments, compared to 42 percent of endowments overall, Commonfund says.

Yet the study suggests the importance of alternative investments could diminish in the future.

“In previous years, the study has shown that educational endowments have steadily increased allocations to alternative investments and international equity, including emerging markets, while lowering allocations to traditional domestic equities and fixed income,” John S. Griswold, executive director of the Commonfund Institute, says in a statement.

That trend slowed in fiscal 2007, he says, “suggesting that we may see more subtle refinements in future asset-allocation decisions.”

Brett Hammond, managing director and chief investment strategist for TIAA-CREF Asset Management, says the NACUBO study also shows a leveling off of alternative investment allocations.

“The question is whether this is a trend, or are we seeing a pause,” he says. “And we don’t know that yet, because we don’t have enough data from successive years. What’s interesting is that the smaller endowments are leveling off at points where they still don’t have as many alternative allocations as larger ones.”

Five in 10 Commonfund respondents reported an increase in gifts and donations in 2007, and nearly three in 10 reported a decrease.

Among institutions reporting debt, the average total debt increased to $101.4 million from $87.1 million in 2006, Commonfund says.

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