NCSE Data: Alternatives Falling Out Of Fashion

by: AllAboutAlpha

The preliminary data gathered for the 2013 NACUBO- Commonfund Study of Endowments indicates that the allocation to alternative investments by the surveyed educational endowments has declined this year from last, from an average allocation of 54% to 47%. The study describes this fall as a "pause in the long run trend" of increased allocations by such institutions. "Alternatives," for the purposes of this survey, included hedge funds, private equity, international private equity, private equity real estate, and distressed debt. The average allocation to domestic equities increased year-to-year from 15% to 20%.

Consider Returns

Meanwhile, educational endowments earned an average investment return net of fees of 11.7% for the fiscal year that ended June 30, 2013. This is a considerable improvement over the negative growth number of the year earlier.

Nacubo is a membership organization of the business offices of colleges and universities, representing more than 2,500 providers of higher education. It compiles this study each year in collaboration with the education and research arm of Commonfund. The Final Study results and analyses are generally available in February.

The surveyed institutions are broken down into six size categories. A reduction in the allocation to alternatives held true for four of those six categories. For the other two, the allocation was unchanged. Within the set of alternative strategies, the accolades for highest return last year must go to distressed assets, which returned 13.2%. This contrasts sharply with commodities and managed futures, which lost money for those endowments that allocated to them, -6.0%. Private equity real estate (non-campus) returned 9%, private equity of other sorts returned 11.3%.

NACUBO President and CEO John D. Walda and his Commonfund Institute counterpart John S. Griswold said in a statement, "the data concerning alternative strategies will bear watching as more colleges and universities report their FY2013 results."

Pauses and Thirsts

Walda and Griswold also mentioned a number of factors that may have contributed to the pause in the aforesaid long run trend. Some of the shift may be the "result of market action," that is, the increase in the value of already-held traditional investments by definition increases their percentage of the portfolio. Domestic and international equities together were the best performing asset classes of the FY.

Separately, Walda and Griswold said, part of the shift may be the consequence of a thirst for liquidity.

On other issues: the study found that the FY2013 effective spending rate averages 4.2%, unchanged since last year. It correlates with the size of the six cohorts: the larger the institution, the higher the effective spending rate. The largest institutions have a rate of 4.8, and the smallest a rate of only 3.6%. The size of the full-time staff working for college endowments is shrinking. In FY2012, there were an average of 1.6 full-time equivalent employees (FTEs) per endowment. In FY2013 that number fell to 1.2.

Outsourcing is behind the change: 42% of survey respondents now say that have substantially outsourced the management of their investments. Five of the six size cohorts say the amount of outsourcing has increased in the last year.