Endowments grow wary, but see opportunities

By Gertrude Chavez-Dreyfuss - Analysis

NEW YORK (Reuters) - At least one group of high-powered investors appears to be holding true to industry doctrine and not selling into a panicked market.

U.S. endowment funds, many just as bruised by the downturn in financial markets as rank-and-file investors, are staying the course as they strive to ride out the storm, according to industry insiders.

Most of these money managers, who control about $411 billion in assets invested for the long term, instead see opportunities in overseas markets, real estate, and private equity -- all sectors hit hard in the recent wave of stock and commodity market crashes.

"We continue to advise our clients that they have to be careful not to be swayed by market volatility and the dramatic changes that have been going on. We have not sold anything and we don't view that our clients are in that position," said Keith Luke, managing director, at CommonFund, a Wilton, Connecticut-based money manager that invests around $40 billion in endowment and foundation money.

"Certainly there is great concern about the declining value of endowment portfolios, but at the same time, since they are long-term investors, they realize that selling at distressed prices in this market would do long-term harm to the value of their portfolios."

The latest CommonFund survey for fiscal year ending June 30, 2007, showed that 23 percent of endowments' allocations were in U.S. stocks, 12 percent in fixed income, 20 percent in offshore equities, 42 percent in alternatives including private equity, hedge funds, and commodities, while 3 percent were in cash.

Luke said that so far, based on initial data for CommonFund's 2008 study, he hasn't seen a great deal of allocation shift. But he noted that with steep market declines, allocations of the fund's endowment clients will look different.

"Still I get the sense that you will not see a lot of dramatic changes. Certainly investors will make sure they get paid a premium for the risk they are taking ... but that doesn't mean they're going to make drastic shifts in their portfolios."

WINNERS IN A BRUTAL YEAR

U.S. endowments and foundations took a beating in the latest fiscal year ending June 2008, with the one-year median performance showing a 4.70 percent loss, said Wilshire Trust Universe Comparison Service, which looks at endowments and foundations worth $1 billion or more. Average endowment losses were 3.04 percent.

There were outperformers, however -- the likes of the $36.9 billion Harvard endowment and $22.5 billion Yale fund -- which managed to post positive returns of 8.6 percent and 4.5 percent, respectively, in 2008 despite a plunge in U.S. and international stocks.

Some analysts said these institutions benefited from alternative investments that don't mark to market on a daily basis. A lot of the bigger endowments have invested in assets that are valued at the end of the calendar year such as private equity and real estate.

So losses in these assets will not be reported until the end of the next fiscal year in June 2009.

LONG-TERM FOCUS

Dartmouth College's endowment, meanwhile, posted a fiscal 2008 gain of just 0.5 percent in assets to $3.7 billion -- down sharply from the 5 percent it had expected. In 2007, its endowment grew 21.6 percent.