I found the Dees article "Enterprising Nonprofits" interesting, specifically as it relates to his discussion of how some traditional nonprofits, such as colleges and universities, have chosen to manage their capital requirements along the Social Enterprise Spectrum.
To that end, I found the following survey published by the National Association of College and University Business Officers (NACUBO):
http://www.nacubo.org/documents/research/News%20release%20&%20fact%20sheet_2007_NES.pdf
The study examines college/university endowments of varying sizes and analyzes 1.) how those endowments are invested (i.e. in what asset classes) and 2.) the average return by endowment size.
The results are somewhat striking (if not surprising). The larger endowments tend to invest much more heavily in alternative asset classes (e.g. hedge funds, private equity, real estate), while the smaller endowments stick much more to a "traditional" stocks, bonds, cash mix.
By spreading money around to different types of investments, these larger endowments also command a much higher average rate of return than do their smaller counterparts. For example, endowments of greater than $1 Billion had an average annual rate of return over the past 10 years of 11.1%, while endowments less than or equal to $25 million had returns of just 6.7%. On a pool of money that size an annual difference of nearly 4.5% over 10 years is huge!
While managers of smaller endowments might not have access to the full spectrum of asset classes, I wonder if there are other reasons that can explain why these managers seemingly choose to eschew alternative investments as a way to enhance portfolio returns (and smooth volatility).
Any thoughts?
In case anyone is interested, here are links to both tables I referenced...
http://www.nacubo.org/documents/research/Average%20Asset%20Allocation%20of%20Total%20Assets_2007%20NES.pdf
http://www.nacubo.org/documents/research/Average%20Investment%20Pool%20Compounded%20Nominal%20Rates%20of%20Return_2007%20NES.pdf
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2 comments:
Matt...I think you mentioned one of the factors that allow for larger endowments to invest in more alternative investment vehicles, and that is access. The minimum investment amount for a given hedge fund may be too high for a smaller endowment that requires a high level of diversity to meet its investment strategy. I know these strategies can be very rigid as set by the board. For example, we saw in finance, that endowments withdrew their funds in Cemex when the company made European acquisitions because it altered the percentage of funds in Mexico and European investments, and violated its strategy.
I think the other primary reason you see more alternative investing among larger endownments is their ability to take on greater risk. For endowments greater than $1B, the cash significant exceeds the need for short-term investments and thus the endowment can be exposed to annual declines if it means larger returns in subsequent years. However, smaller endowments do not have the scale to accept this risk and thus must use more conservative investments, such as index funds, bonds, and cash.
There might also be something to the larger endowments being able to either hire or partner with more sophesticated investment advisors that have expertise in these investments. Although one would hope that nearly all education institutions would place equal importance on the management of their endownment.
It would be interesting to really uncover what other factors, aside from endowment size, impact investment decisions.
Matt... I have long suspected such differences in endowment returns. I would like to point another less-quantifiable reason for these differences. The investment managers for Yale and Harvard have become iconic in the field of investment management because of their large returns. Frankly, I think the risk factor depends somewhat on a difficult-to-measure "ability to garner donations" metric. It would be interesting to estimate the total outstanding wealth of alumni at these institutions. XYZ University versus Harvard would probably account for some of the "alpha" return that Harvard's endowment earns. For example, if a small private liberal arts college were to lose half its endowment it would be devastating. Whereas Harvard alum would most likely be able to "bounce" back from any significant market turns. This is all anecdotal, but it might help to explain the unmeasured "noise" in the data.
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