|
U.S. EDUCATIONAL ENDOWMENTS AND FOUNDATIONS REPORT SIGNIFICANT IMPROVEMENT IN RETURNS IN FISCAL YEAR 2004 --BENCHMARK LEADERS REPORT LOWER THAN AVERAGE ALLOCATIONS TO HEDGE FUNDS
2005 Commonfund Benchmarks Study® reports Average Returns of 14.7%, Average Spending Rate of 4.8%, Increased Gift Levels and Reduced Debt
WILTON, CT, JANUARY 6, 2005 – United States educational endowments showed significant improvement in returns in Fiscal Year 2004 according to the fifth annual Commonfund Benchmarks Study™ of 707 private college and university endowments, public educational endowments, independent school endowments, and private foundations in support of education. Educational endowments and foundations reported average annual total returns (net of fees) of 14.7% in FY 2004. This compares with reported average annual total returns of 3.1% for FY 2003, -6.0% in FY 2002, -3.0% in FY2001 and 13.2% in FY2000. Among Benchmark Leaders, defined by superior returns for the year, Top Decile institutions reported an average FY 2004 annual total return (net of fees) of 21.5%, and Top Quartile institutions an average return of 19.6%.
“The significantly improved returns seen this year build upon the successes of last year, which pulled educational endowment returns back into the black after three very difficult years (FY 2000-2003). We continue to see educational endowments and foundations working at the cutting edge of asset allocation, diversification and risk management, particularly the Benchmark Leaders,” said John S. Griswold, Executive Director, Commonfund Institute. “Top educational endowments and foundations were some of the first to explore new alternative asset strategies including hedge funds. This year’s study shows that within their allocations to alternative strategies, the Benchmarks Leaders reported lower than average allocations to hedge funds and are more broadly diversified, with higher than average allocations to private equity real estate and energy/natural resources. This may signal a broader industry recognition of the need for more due diligence, risk management and proper diversification of an alternatives portfolio.”
Average Annual Returns - 4 Yr Trend (June 30 – June 30)
Total institutions report expectations for lower returns next year. The Average Return Assumption for FY 2005 is 7.9%. Larger institutions report higher return assumptions than do smaller institutions, ranging from 8.6% for endowments over $1 billion to 7.4% for those under $10 million. The Average Return Assumption for the next three years is 8.1%, ranging from 8.8% for endowments over $1 billion to 7.7% for those under $10 million.
Asset Allocation
Average allocations showed modest changes from FY 2003 to FY 2004. Overall allocations in FY 2004 were: domestic equity (31%), fixed income (15%), international equity (16%), alternative strategies (34%) and cash/short term (4%). This compares with FY 2003 allocations of 32% to domestic equity, 21% to fixed income, 13% to international equity, 32% to alternative strategies and 2% to cash.
The 2005 CBS institutions as a whole reported very modest adjustments to domestic equity holdings in FY 2003-2004, except for the smallest institutions (under $10 million), which reported a marked increase in large cap at the expense of all other equity categories. Within equity, Benchmark Leaders in the Top Decile and Quartile groups reported lower than average large cap and passive/indexed holdings, higher than average small cap holdings, and comparable mid cap holdings compared with Total institutions.
Comparison of FY 2004 Asset Allocation for Total, Top Decile and Top Quartile Performers
|
|
Total Institutions |
Top Decile |
Top Quartile |
|
Total Number of Institutions |
707
|
67
|
163
|
|
Asset Class |
|
|
|
|
Domestic equity |
31% |
27% |
29% |
|
Fixed income |
15% |
14% |
13% |
|
International equity |
16% |
18% |
18% |
|
Alternative investments |
34% |
36% |
35% |
|
Cash |
4% |
5% |
5% |
In fixed income, there was modest increase in high yield bonds at the expense of domestic bonds for institutions in all size categories. The Top Decile and Quartile groups reported lower than average domestic bond holdings, higher than average international bond and high yield bond holdings, and comparable global bond holdings vs. Total institutions.
Among total respondents, there were very modest changes to alternative strategies from 33% to 34% allocation in FY 2003-2004, with a small increase in marketable alternatives and energy/natural resources, and reductions in venture capital, private and public equity real estate and distressed debt. However, Top Decile and Top Quartile performers reported lower than average allocations to marketable alternatives (hedge funds), higher than average allocations to private equity real estate, energy and natural resources, and comparable allocations to private equity, venture capital, public equity real estate and distressed debt.
Benchmark Leaders in the Top Decile and Quartile groups made some noteworthy changes in asset allocations in FY 2004. Most notably, alternative strategies were significantly reduced from 44% and 42% in FY 2003 to 36% and 35% this past year and domestic equity allocations were increased from 21% and 22% respectively in FY 2003 to 27% and 29% respectively this past year. International equity was increased from 15% in FY 2003 to 18% for both groups. Fixed income allocations were reduced from 20% in FY 2003 to 14% and 13% respectively. Cash allocations increased from 0% and 1% in FY 2003 to 5% for both groups.
Most institutions expect to make no change to their allocations in the coming year. Twenty-four percent expect to decrease domestic equities. Thirty percent expect to increase allocations to alternative strategies in the coming year, while 29% expect to make no change in alternative strategies allocations. Only 2% expect to decrease their alternative strategies allocations.
Benchmark Leaders vs. Total Institutions
There were some notable differences between Benchmark Leaders and the 2005 CBS institutions as a whole.
- Despite their superior performance, more than half of the Top Decile (52%) and the Top Quartile (53%) institutions report they have underwater funds, compared with only 44% of Total institutions. The proportion of Total institutions reporting underwater funds declined year over year, from 54% to 44%.
- Lower average debt as a percent of endowment was reported by Top Decile institutions (23%) and Top Quartile (26%) vs. Total institutions (32%). Benchmark Leaders also reported lower average debt service as a percent of operating budget – Top Decile with 4.5% and Top Quartile with 4.6% vs. Total institutions with 5.2%.
- As expected, Benchmark Leaders as a group devote more resources to the investment function than the 2005 CBS institutions as a whole. The Top Decile group reports using an average of 16.1 investment managers and Top Quartile an average of 17.2 managers, compared with an average of only 12 managers for Total institutions. Staffing reveals a similar gap, the Top Decile reports an average of 4.1 full-time equivalents (FTEs) and Top Quartile reports an average of 2.7 FTEs in the investment function. This compares with an average of 1.2 FTEs for Total institutions.
Almost all of the Top Decile (96%) and Top Quartile (94%) institutions reported rebalancing their portfolios, compared with 78% of Total institutions - a continued increase for Total institutions from 75% in FY 2003 and 62% in FY 2002. Rebalancing is more common among the largest institutions (86%) than the smallest (61%).
Spending Rates and Operating Budgets
The average spending rate reported for FY 2004 was 4.8%, compared with 4.9% in FY 2003, and 5.1% in FY 2002. More than half (52%) of institutions reported no change to their spending rate in the past year, 31% reported a decrease and 14% an increase in their spending rate. Generally, larger institutions have a higher spending rate than smaller institutions – 5.1% among the over $1 billion group, compared with 3.5% among the under $10 million group. Forty-two percent report spending in dollars decreased, 35% report spending in dollars increased, and 17% report no change. More than half (54%) set their spending policy to maximize intergenerational equity.
Thirty-seven percent of Total institutions report their spending policy principle is to provide a consistent or growing stream of income to the operating budget. The overall percentage of the operating budget funded by the endowment declined year over year, from 13% to 11%. The percentage funded grew at the largest institutions (13% to 15%), while the percentage was reduced significantly at the smaller institutions (10% to 7%) and the smallest institutions (10% to 3%). Overall, 17% report that the percentage of operating budget funded by the endowment increased over the past year, while 41% report it decreased and 36% report no change.
However, 16% report having made cuts to the operating budget in the past year. The most frequently cited areas where cuts were made included Administration (48%), Buildings /maintenance (45%), Across the board (39%), and Academic programs (30%). Twelve percent report they expect to make cuts to the operating budget in the coming year. The smallest institutions are far more likely (19%) than the largest (6%) to make cuts. Fourteen percent overall report they used HEPI (the Higher Education Price Index)*, an annual measure of inflation for colleges and universities, which was used most frequently in the budget process (54%).
Gifts
Forty-two percent of institutions report an increase in gifts this past year (compared with 34% for FY 2003), while 26% report decreased gifts and 29% report no change in gifts for the past year. The largest institutions most often reported increased gifts (54%), and the smallest institutions reported decreased gifts (18%) least often than others. The average dollar amount of total new gifts to endowments for FY 2004 was just over $7 million, with the largest institutions reporting average total new gifts of $73 million and the smallest reporting an average $555 thousand. This compares with an average of $6.9 million for FY 2003, with the largest reporting an average $64 million and the smallest reporting an average $500 thousand. Annual giving funded an average 7.3% of the operating budget.
Debt Levels
Overall, 48% of institutions report a decrease in their debt level over the past year, with smaller institutions more often reporting reductions. The average total debt reported for FY 2004 is $86.7 million, ranging from an average $617 million at the largest institutions to an average $7.5 million among the smallest. The average FY 2004 dollar-weighted debt, stated as a percent of endowment value, is 32%, a finding that varies from an average 18% among the largest institutions to an average 140% among the smallest. This compares with 30% for FY 2003. The average reported debt service, stated as a percent of operating budget, is 4.0%. This compares with an average 6% a year ago. An average 81% of debt is fixed rate, compared with 82% a year ago. Most institutions (51%) do not plan to increase debt in 2005. Overall, 19% report they plan to increase debt levels in the coming year, a finding more prevalent among the largest institutions.
Interviews for the 2005 Commonfund Benchmarks™ Study were conducted during the third and fourth quarters of 2004, and reflect responses of 707 institutions for fiscal year 2004. For more than 80% of the study participants, this fiscal year ended on June 30.
* Commonfund acquired The Higher Education Price Index (HEPI) in 2004, and will be issuing a revised HEPI in the spring of 2005.
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 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 $30 billion for more than 1,500 educational institutions, foundations, healthcare 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
Refer this article to a friend
|
|