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PE fuels returns for US endowments

A NACUBO-Commonfund study finds that alternative strategies averaged 14.1% returns for US colleges and universities in FY 2011.

Private equity and alternative investment strategies continue to play a leading role in the portfolios of US endowments, according to a recent study conducted by Commonfund and the National Association of College and University Business Officers.

College and university endowments are coming off a strong year, averaging 19.2 percent annual returns as of 30 June, according to the study.

Those returns were due, in part, to the strength of endowments’ alternative portfolios after two down years. Alternatives generated an average return of 14.1 percent in 2011, after posting 7.5 percent in 2010 and negative 17.8 percent in 2009.

The NACUBO-Commonfund study classified alternatives as including private equity, hedge funds, venture capital, real estate, energy and natural resources, commodities, managed futures and distressed debt, with private equity strategies generating 18.7 percent on the year. Venture capital rebounded strongly after a weak 2010, generating a 21.7 percent return – a 12.1 percent increase. 

“[Alternatives] continue to be a part of the part of the investment process that dampens volatility,” said Verne Sedlacek, president and chief executive officer of Commonfund, at a press conference.

Endowments with more than $1 billion in assets tended to have the highest allocations to alternatives, averaging 60 percent, 26 percent of which is dedicated to private equity, according to the study. Smaller endowments, which averaged only a 10 percent allocation to alternatives, have adopted conservative investment strategies since the economic downturn in 2008, focusing their asset allocations on more liquid assets like equities, fixed income and cash, according to Sedlacek.

While endowments benefitted from rebounding alternatives returns, their strongest returns were in domestic and international equities, which generated 30.1 percent and 27.2 percent respectively. The study period did not include the second half of the calendar year, when volatility in the public markets was at its peak.

The NACUBO-Commonfund study analysed the returns from 823 US colleges and universities, which represent $408.1 billion in assets. Although FY 2011 proved to be a strong year for the endowments studied, 47 percent of respondents reported that their endowments remained below the amounts they had reported in FY 2008.