(November 6, 2013) — Endowments are allocating less to alternatives and more to US and international equities, according to preliminary data from NACUBO and Commonfund.
The data studied asset allocations and performances of 461 US colleges and found the average allocation to alternative strategies—marketable alternatives, private capital, distressed debt, and private equity real estate—fell to 47% this year from 54% last year.
The decline may indicate a possible “pause” in long-term investments to the asset class, the report said. There was also an increase in average allocation to equities—exposure to US equities rose to 20% from 15% and international equities to 19% from 16%.
Endowments’ allocation to fixed income remained at an average of 11%.
“Colleges and universities may be shifting some assets into more liquid strategies, but because domestic and international equities were the two best performing asset classes in fiscal year 2013, some of the shift may have been the result of market action,” said John Walder, NACUBO president and CEO, and John Griswold, Commonfund Institute’s executive director, in a joint statement.
These shifts in asset allocation could also be due to endowments’ low expectations for alternatives, according to a paper entitled “Investment Beliefs of Endowments.” The authors found alpha projects for hedge funds averaged only 0.7% per year.
Preliminary returns for fiscal year 2013 reflected endowments’ move away from alternatives. The asset class had a return of 8.6% this year, significantly lower than 20.5% of US equities but higher than fixed income’s 2.4%.
Of various alternative strategies, distressed debt performed best, with returns at 13.2%, private equity at 11.3%, and 10% for marketable alternatives, NACUBO and Commonfund found.
The report also found a decline in full-time equivalent employees (FTEs) in endowment investment teams—an average of 1.2 FTEs from 1.6 FTEs last year. This pointed to a rise in outsourcing to 42% of respondents from last year’s 38%.
NACUBO and Commonfund also found endowments returned an average of 11.7% for fiscal year 2013. Trailing three-year returns averaged at 10.4%, five-year returns 4.3%, and 10-year returns 7.1%.
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