U.S. EDUCATIONAL ENDOWMENTS REPORT INCREASED AVERAGE RETURNS OF 10.9% TO DATE IN 2006
Preliminary 2007 Commonfund Benchmarks Study™ Reports International Equity Returns Average 24.5%; Alternative Investment Returns Average 15.2%; Alternatives and International Equity Allocations Increase; Domestic Equity and Fixed Income Allocations Decrease
WILTON, CT, October 25, 2006 – U.S. educational endowments report average returns of 10.9% to date in Fiscal Year 2006, according to preliminary results from the 2007 Commonfund Benchmarks Study of Educational Endowments (CBS). This was a substantial increase over average annual total returns of 9.7% reported for FY 2005. The average return assumption for FY 2006 was 8.0% reported in the 2006 CBS. This improved performance helped drive average three-year returns to 12.3% in 2006 vs. 9.6% in 2005 and average five-year returns to 6.9% vs. 3.5% in 2005.
“These are encouraging results,” says John S. Griswold, executive director of the Commonfund Institute. “Taking into account that these are preliminary data, they do indicate that U.S. endowments enjoyed solid returns on their investments last year.”
Preliminary 2007 CBS results are based on responses from 255 endowments, about 35% of the expected respondent pool for the final study. Current completed interviews include a higher proportion of very large endowments than the final study.
Within this group of current participants, international equities represented the top performing asset class last year with an average return of 24.5%. Returns on domestic equities averaged 10.6%, while fixed income returns averaged 0.8%. Average returns across the various alternative asset classes used by participating endowments were 15.2%.
Asset Allocation Changes
Among the endowments interviewed thus far, allocations to domestic equities decreased to 27% of total assets in FY 2006 vs. 28% in FY 2005 and fixed income allocations dropped to 13% vs. 16%. There were increases in allocations to international equity, which were 19% vs. 18% in 2005, and alternatives, which were 39% vs. 35% in FY 2005.
“While final allocation numbers will change to some extent as additional endowments are interviewed, the results so far point to a clear correlation between endowment size and exposure to alternative asset classes — a finding that might explain why large endowment funds outperformed smaller funds over the 12-month period,” Griswold notes.
Looking to the future, about one-quarter of participating endowments say they plan to cut allocations to domestic equities, while approximately one-third plan to increase allocations to hedge funds, private equity and other alternative strategies.
Spending, Operating Budgets and Endowment Growth
Average spending rates among participating endowments were essentially flat over the past 12 months at 4.5-4.6%. However, nearly 70% of respondents increased their spending in total dollar terms. “Relatively strong investment returns allowed many endowments to maintain their spending rates even as they spent more,” Griswold says.
Seventy percent of the endowments interviewed to date also say they increased their operating budget from FY 2005 to FY 2006, while only 3% reported reductions. Among those in the former group, the average increase in operating budget was 5.8%. Contributing to these increases were big jumps in costs for healthcare, utilities and other items, as evidenced by a 5% rate in HEPI (Higher Education Price Index.)
Current survey respondents report that nearly 71% of endowment growth is attributable to investment returns. Gifts accounted for approximately 4.5% of the growth in the respondents’ total asset pool.
About Commonfund Institute
Commonfund Institute was founded to house the education and research activities of Commonfund and to provide the entire nonprofit community with investment information and professional development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. Commonfund Institute provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications including the annual Commonfund Benchmarks Study® and The Higher Education Price Index (HEPI); and events such as the annual Commonfund Endowment Institute and the Commonfund Prize for the best contribution to endowment investment research. Its broad range of programs and services are designed to serve financial practitioners, fiduciaries and scholars.
About Commonfund
Founded in 1971, Commonfund is devoted to enhancing the financial resources of educational and other nonprofit institutions including endowments, foundations, healthcare and service organizations through superior fund management, investment advice, and treasury operations. Directly or through its subsidiaries, Commonfund Capital, Commonfund Realty, and Commonfund Asset Management Company, Commonfund manages approximately $38 billion for more than 1,600 nonprofit healthcare, educational institutions, foundations, and other nonprofit institutions, representing one of the largest pools of educational endowment and operating funds in the world. In response to the growing needs of nonprofit institutions, Commonfund, together with its subsidiary companion organizations, offers more than 45 different endowment investment programs including funds for the management of short- and intermediate-term operating cash reserves. All securities are distributed through Commonfund Securities, Inc. www.commonfund.org.
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