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Endowments geared for downturn

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Todd Cohen

With a recession looming, officials at charitable endowments say they are prepared with diversified investment strategies that focus on long-term returns but can respond quickly to market changes.

“The important thing is to have a well-diversified portfolio and one that’s flexible enough to capture opportunities when they present themselves in the marketplace,” says Ray Jacobson, vice president for investments at the Golden Leaf Foundation in Rocky Mount.

The investment strategy at the Raleigh-based North Carolina Community Foundation aims for long-term investment growth and sufficient income for endowments at foundation to make annual grants totaling five percent of their assets, says John Hartley, director of finance.

“That would allow us to ride out the anticipated downturn in the market such as we’re experiencing right now,” he says.

A diversified portfolio with a long-term view also is the investment strategy at N.C. State University, says Kathy Hart, university treasurer and associate vice chancellor for finance and business.

“We are not trying to time the markets,” she says. “The endowment has the luxury of being perpetual investors.”

Investment returns at the Golden Leaf Foundation, which has roughly $700 million in assets, totaled 10.6 percent in 2007.

Working with 40 investment managers and New Hampshire-based consultant Prime, Buchholz & Associates, the foundation’s investment policy calls for a diversified allocation of assets.

The foundation allocates 45 percent of assets to global equities, 15 percent to fixed income and cash, 20 percent to hedge funds, 10 percent to private equity, and 10 percent to real assets such as real estate and energy partnerships.

In recent years, the foundation has increased the share of assets allocated to alternative investments, which represent 40 percent of the portfolio.

That shift, says Jacobson, aims “to build a more diversified portfolio that can achieve the same or higher return with lower risk.”

Alternative investment managers have “more flexibility and are more opportunistic than some of the more traditional managers,” he says.

And as the economy stumbles, he says, the foundation has been looking closely at “distressed opportunities” in private equity, credit and real estate.

The North Carolina Community Foundation, with $120 million in assets, allocates 65 percent to equity, 30 percent to fixed income and 5 percent to cash.

The foundation generated a 7 percent annual investment return over the past three years, including 6.3 percent in 2007.

The foundation works with 12 asset mangers and with Wachovia Securities, which monitors the portfolio, makes recommendations, and tracks the performance of the asset managers.

In 2006, the foundation’s finance committee updated its investment policy to include alternative investments but has not yet given its assets managers the go-ahead to make those investments.

N.C. State University, with $535 million in assets on June 30, 2007, reported an investment return of 18.2 percent for its most recent fiscal year.

Of those total assets, roughly $350 million are held by the N.C. State Investment Fund, a pooled investment vehicle in which endowments of the university and its affiliated entities can choose to be invested.

Working with SEI Asset Management, a “manager of managers,” the investment fund allocates 80 percent of its portfolio to growth strategies and 20 percent to stability strategies.

Alternative strategies represent roughly 20 percent of the portfolio, a share that has grown significantly since the endowment fund began allowing alternatives as an option roughly five years ago.

While five years is too short a time to see significant returns from alternatives, Harts says, the investment fund expects “to show improved returns over longer periods.”

A diversified portfolio “provides you with opportunities,” she says.

“If one allocation is not performing, hopefully another one will be.”

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