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Education investment returns tank

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While higher-education endowments boast some of the best investment strategists in the world, colleges and universities were not immune to the market turmoil of 2008.

U.S. colleges and universities lost an estimated average of 24.1 percent on their investments in the second half of 2008, says a year-end update study from the Commonfund Institute.

For the 235 institutions analyzed for the update, assets totaled $114.5 billion as of June 30, 2008, with combined investment losses between then and the end of the year estimated at $27.6 billion in endowment value.

“Even this isn’t the whole story,” says John Griswold, executive director of the institute. “We’re seeing further declines after the first of January, and of course we still have marks-to-market in certain illiquid asset classes to come.”

And he estimates that over the last 14 months combined assets of higher-education groups likely have fallen as much as 30 percent.

The largest institutions, those more than $1 billion in assets, fared best, with a 21.7 percent loss, while schools with assets under $10 million were hardest hit, losing an average of 30.2 percent.

While colleges and universities continued to shift their asset allocations in the last half of 2008, moving out of equities and into alternative investing strategies, there wasn’t a lot of movement, says Griswold.

“People are not making major changes to asset allocation because the market is doing it for them,” he says. “It’s difficult to rebalance because there’s not much cash and to generate cash would mean selling at depressed prices.”

The share of investments in domestic equities fell to 17 percent by the end of 2008, down from 23 percent as of June 30, while international equities fell to 15 percent from 18 percent over the same period.

Cash holdings increased to 4 percent of portfolios from one percent over the last half of 2008, while fixed-income allocations rose slightly to 13 percent from 12 percent.

Allocations to alternative strategies grew to 51 percent of portfolios as of the end of 2008, up from 46 percent six months earlier, with the top-performing 10 percent of institutions placing an average of 63 percent of their assets in alternatives.

In general, allocations within alternative strategies changed little during the second half of 2008.

However, private equity real estate fell to 12 percent of portfolios on average from 16 percent, while distressed debt spiked to a five percent share from two percent.

While endowments have outperformed the Dow Jones Industrial Average, which has lost over half its value, colleges and universities are worried and seem to be taking the situation seriously, says Griswold.

“We see the sectors, particularly higher education, really buckling down,” he says. “Many have been working on their spending rate and the dollars transferred to the operations budget. They’re cost-cutting and trying to go out and talk to their best donors. Everyone is putting in extra effort.”

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