WILTON, Conn. - The nation's largest endowments have close to one-third of their assets in alternative asset classes, outnumbering the amount they have in domestic and international fixed income combined.
And among all endowments, the average allocation to alternative asset classes is a sizable 23%, according to the Commonfund Group's first study of U.S. educational endowment funds.
The full "Commonfund Benchmark Study" is due out in June, but many findings were released during a special presentation at Commonfund's annual conference March. 13 in Orlando, Fla.
The study was undertaken last spring after Commonfund received inquiries from many of its 1,400 educational endowment members. John Griswold, senior vice president, said that to his knowledge, it was the first study of its kind. In total, 563 endowments representing $190 billion in assets participated.
The study includes detailed breakdowns of asset allocation, manager selection criteria and investment policies. For the purposes of reporting data in the study, endowments were broken out by size: those with less than $10 million; $10 million to $50 million; $51 million to $100 million; $101 million to $500 million; $501 million to $1 billion; and more than $1 billion.
Endowments with more than $1 billion in assets have on average 29% of their assets in alternative asset classes. The number is significant because the same respondents have an average allocation to domestic equities of 35%, a mere six percentage points higher. Even though this is the first year the study was done, Commonfund officials believe the results show an increasing exposure to alternatives.
The largest endowments averaged a 23.9% return in their most recent fiscal year, according to the study. Mr. Griswold said the high returns probably were the result of those funds' high exposure to alternative asset classes. (The study labeled as alternatives: hedge funds, venture capital, domestic private equity, equity real estate, energy and natural resources and international private equity.)
Among all endowments, the study showed an average alternatives allocation of 23%, two percentage points higher than the allocation to total fixed income. "We were a little surprised the number was as high as it was," said Mr. Griswold.
However, the study found smaller endowments to have smaller allocations to alternatives. Endowments with $501 million to $1 billion in assets averaged only 18% of total assets in alternatives. The number drops to 5% of total assets among funds with $10 million in assets or less.
Most endowments expect to venture further into the alternative universe, especially to venture capital, private equity and hedge funds over the next three years.
In equities, endowments preferred active core and large-cap equities to small-cap and indexed equities. Among all endowments, active core equities made up an average 23% of the total equity allocations. On average, large-cap value and large-cap growth equities each made up 17% of equity portfolios.
And, active international equity investment is likely to be increased over the next few years, the study found.
The largest endowments had the highest exposure to international fixed income as well. On average, funds with $1 billion or more in assets invest 6% of their fixed-income portfolios in international bonds.
Commonfund's study found smaller endowments to be conservative in more than one area. In addition to their low allocations to alternatives, smaller funds maintained high allocations to short-term securities and cash. For endowments with less than $10 million in assets, the average allocation to cash was 5%.
Mr. Griswold said smaller funds often want high liquidity. However, he cautioned that cash and short-term securities can be a "drag" and impede the growth of assets.
Sixty-five percent of endowments have a spending policy that identifies "spending a pre-specified percentage of a moving average of market values," according to the study. That specified percentage has averaged near 5% for the past five years. However, Mr. Griswold believes that could change during an extended bear market.
Not meeting targets
The study also found that the largest and smallest endowments each spend less than their goals. Large schools, which benefit from their high returns, often see their spending rate pale in comparison, while smaller schools do not have the resources necessary to justify a high spending rate.
The study was done by the Commonfund Institute, a research group within the Wilton-based manager of managers firm.