Alternative Investments Account for 23 Percent of the Value of Education Funds, Study Finds By KIT LIVELY
Orlando, Fla.
A surprising 23 percent of the assets in education endowments are in alternative investments, like hedge funds and venture capital, and officials expect to keep them there, according to a new study by the asset-management company Commonfund, which released a summary of preliminary results on Tuesday at a meeting here.
"The 23 percent in alternative investments is much higher than we expected from our experience," said John S. Griswold Jr., a senior vice president of the Commonfund.
Large endowments were most likely to contain alternative investments, with 29 percent of institutions with endowments larger than $1-billion reporting that they held them. That percentage dropped to 18 percent for endowments valued between $501-million and $1-billion, 15 percent for those valued between $101-million and $500-million, and less than 10 percent for smaller endowments.
Endowment managers said they were most likely to put more money into international investments, venture capital, and hedge funds over the next three years, while keeping their holdings in domestic stocks and bonds relatively constant.
The "Commonfund Benchmarks Study" is so named because it will allow colleges to compare their endowments with those of peer institutions, in areas like investment allocation and performance. The study also quizzed college investment officers about their spending policies, the characteristics of their investment committees, the thoroughness of their investment guidelines, and which investment risks worried them most. About half of the managers said they worried most about market risk, particularly whether they hold the right kinds of assets and whether their portfolios are diversified enough. Only about 7 percent reported worries about whether their endowments would produce the money their institutions needed for operations, and 4 percent worried about fiduciary risks like whether their boards were adequately informed about the endowment's operations.
The report includes responses from 563 public and private institutions, about 70 percent of which are colleges. About 90 percent of the respondents belong to the Commonfund, a nonprofit membership organization that offers investment funds and advice to colleges, private schools, and some other nonprofit institutions. Most of its clients have endowments smaller than $100-million.
Other findings of the study include:
* The annual net returns for the 2000 fiscal year were 13.2 percent, although they were 23.9 percent for the 32 participants with endowments larger than $1-billion, probably because of alternative investments. Fiscal years at most institutions end on June 30. * The average long-term spending goal for endowments is 4.9 percent -- the same average percentage of their total assets that institutions actually spent over the last five years.
The questions about investment policies revealed some desirable and some undesirable practices. Nine out of 10 institutions reported having written guidelines for practices like deciding how assets should be allocated and what kind of investments are permitted. However, only half of the guidelines assign authorization and accountability for specific activities, like cash withdrawals and modifying strategies, and detail specific actions to be taken if policies are not followed.
This was the first year for the survey, which was conducted by Greenwich Associates and is to become an annual study. The next round of questionnaires will be sent out next fall and followed up with phone calls, said Christine A. England, a consultant who was research director for the survey.
Full results will be available in print and online in late May or early June and will classify institutions according to factors like size, type, and location so that colleges can compare themselves with their peers. The data will be free for Commonfund members, Mr. Griswold said; the organization has not set charges yet for nonmembers.