No doctoral dissertation can be as convincing as money in the bank. That’s the case being made by several studies released in recent weeks that contend endowments and foundations, particularly large academic institutions, have reaped greater returns than their corporate and public pension counterparts. Several number crunchers credit the endowment and foundations’ superior asset allocation returns to alternative investments and private equity.
In February, a study released by financial advisory firm Wilshire Associates said that 2005 median total returns for endowments and foundations beat both corporate and public pensions with a gain of about 8.67%, compared to corporate pension gains of 7.63%, and a 7.55% increase for public pensions. The Santa Monica, Calif.-based firm found that endowments and foundations with more than $1 billion in assets had a median performance of 8.63 percent.
The $1 billion mark was also cited by the National Association of College and University Business Officers (NACUBO), which released a study in cooperation with the investor TIAA-CREF. NACUBO found that endowments and foundations which manage $1 billion or more in assets had higher allocations to private equity and likewise higher returns. Average institutional allocation to private equity drops along with its assets under management, according to NACUBO.
Larger endowments are likely to have a longer history of private equity investment and are more apt to be able to commit larger amounts of capital to a single fund.
Many top-tier private equity funds have minimum investment levels that are quite high and usually out of reach of smaller groups.
Also, persistent concerns over allocation issues, such as the recent case with the Ohio Bureau of Workers Compensation, have driven up the stock of foundations and endowments even further among private equity GPs, who fear sensitive portfolio information my be disclosed by the Freedom of Information Act or other disclosure laws.
Roz Hewsenian, managing director and senior consultant of Wilshire Associates, credits better asset allocation as the determining factor in performance between the different classes. Hewsenian also pointed out that LPs tend to have higher allocations in alternative assets and private equity, which would also account for the better performance.
Another study released this year by the Commonfund Institute, the research arm of the Wilton, Conn.-based asset manager Commonfund, concurs with the Wilshire study, though its focus was solely on educational institutions.
The Commonfund found that college and other educational endowments and foundations reported average annual returns of 9.7% in 2005. Commonfund Institute Executive Director John Griswold said in a statement announcing the findings that the leading endowments “achieved significantly higher returns by increasing allocations to alternative strategies and reducing allocations to domestic equity.” He added that this shows the need for all institutions to have “proper diversification of an alternatives portfolio.”
Hewsenian emphasizes that comparisons between the two types of limited partner groups are unfair, because corporate and public pensions face regulations that endowments and foundations do not.
“Endowments and foundations can take risks that pension funds may not be able to take because of the constraints of their liabilities,” Hewsenian says. “Pension funds and endowments and foundations are completely different kinds of investment pools with completely different purposes and objectives.”