EDUCATIONAL ENDOWMENTS’ INVESTMENT RETURNS WERE -2.7% in FY2008, FORESHADOWING LATER LOSSES
More Significant Declines Reported for the First Five Months of FY2009

WILTON, CT., January 27, 2009 – The average annual total return earned in fiscal 2008 by the 628 U.S. institutions participating in the 2009 Commonfund Benchmarks Study^® of Educational Endowments was -2.7 percent (net of fees), down sharply from 16.9 percent in last year’s Study and foreshadowing the much larger losses suffered toward the end of calendar 2008. This was the third time that negative returns have been reported in the nine years that the Study has been conducted, and follows a year in which educational endowments reported the highest annual returns in the Study’s history. Returns and other data in the Study were for fiscal year 2008, the 12-month period between July 1, 2007, and June 30, 2008.

As previously announced, beginning in FY2009 Commonfund Institute and the National Association of College and University Business Officers (NACUBO) will combine their separate studies of educational endowments into a single NACUBO–Commonfund Study of Endowments (NCSE), for release in early 2010. In a further collaboration, during the closing days of 2008 the two institutions jointly sponsored a follow-up study of investment performance in the first five months of FY2009 (from July 1 through November 30, 2008) and found that educational endowments had further losses in the latter part of the calendar year, with an estimated average return of -22.5 percent for the period. This survey, of 435 institutions of higher education, was conducted in early December.

“While fiscal 2008 was difficult for educational endowments, the negative 2.7 percent return was manageable. It was in the period after the close of the fiscal year on June 30 that very serious erosion of endowment values took place,” said John S. Griswold, Executive Director of Commonfund Institute, which sponsors the Benchmarks Study.

The follow-up study showed that the value of participating institutions’ endowments (investment returns plus gifts, bequests and other donations) changed by an average of -22.9 percent in the first five months of FY2009. Institutions were also asked if they expect to change their endowment draws for the remainder of FY2009. Overall, about 61 percent said they expected no change; 27 percent said they expected to draw less; only 1 percent said they expected to draw more; and 12 percent said they did not know.

A final question in the follow-up study asked if institutions expected to increase their endowment’s spending rate, decrease it or leave it unchanged. Overall, about 45 percent said they anticipated no change; 4 percent said they expected to increase their spending rate; and 17 percent said they expected to decrease it. However, 35 percent gave no response or said they did not know, and among institutions with endowments of $25 million or less this response rate grew to 51 percent. With such a large proportion of institutions unsure of their spending plans, it remains to be seen how spending rates will ultimately be affected by the investment losses of FY2008 and FY2009 to date.

Performance Varies Widely

In the main Benchmarks Study, reported FY2008 returns varied widely by asset class. Negative results were led by a -10.2 percent return for domestic equities and a -7.6 percent return for international equities. In comparison, in FY2007 domestic equity returns were a strong 19.5 percent and international equity returns led all other asset classes with a 28.3 percent return. Even distressed debt strategies, which might have been expected to shine in the slowing economic environment, posted a moderately negative return of -0.6 percent.

The fiscal year’s best return came from the diverse group of alternative strategies, led by the 27.6 percent gain by the category of energy and natural resources, commodities and managed futures. Within that larger category, the subcategory of commodities and managed futures returned 31.9 percent and the energy and natural resources component advanced 18.3 percent in the very strong markets for energy and raw materials that prevailed in the first half of the year. Among other alternative strategies, venture capital returned 9.7 percent, private equity returned 8.9 percent and private equity real estate (non-campus) returned 4.8 percent. The laggard was marketable alternative strategies, a category that includes hedge funds, absolute returns funds, 130/30 and other strategies, whose 2.5 percent return was well behind the 15.8 percent gain reported last year. Returning to publicly-traded asset classes, fixed income provided a 6.5 percent return while short-term securities and cash returned 4.9 percent. Participating endowments reported that average annual three-year returns for the fiscal year ended June 30, 2008, declined to 8.4 percent from 12.8 percent in FY2007. The average annual return for the trailing five-year period was 10.1 percent in this year’s report compared with 11.5 percent last year.

Alternatives Gain Share of Portfolio

With public equity markets declining sharply, available cash being used to support ongoing operations and private capital strategies benefiting from a somewhat slower mark-to-market calendar, the long-term trend for alternative asset strategies to capture a greater share of educational institutions’ investment portfolios continued in FY2008. The Benchmarks Study shows that the average institution’s allocation to alternative strategies jumped four percentage points to 46 percent, and to an average of 52 percent among the largest endowments with assets in excess of $1 billion.

The increase in the alternative strategies allocation was offset by a decline in the share allocated to international equities, to 18 percent this year from 20 percent last year. Study participants maintained average domestic equity allocations at 23 percent in FY2008, unchanged from FY2007, and kept the average fixed income allocation steady at 12 percent. Short-term securities and cash declined to 1 percent from 3 percent.

Among alternative strategies, marketable alternatives (a category that includes hedge funds, absolute return strategies, market neutral strategies, long-short equity, 130/30, event-driven strategies and derivatives) account for 42 percent of the allocation, well ahead of private equity (including LBOs, mezzanine debt, M&A funds and international private equity) at 19 percent. However, while the latter went unchanged year over year, marketable alternatives declined by six percentage points. Private equity real estate accounted for a 16 percent share; energy and natural resources, 14 percent; venture capital, 7 percent; and distressed debt (which may be part of an overall credit strategy), 2 percent.

The average effective spending rate for educational endowments participating in the Study – the result obtained by dividing the dollars spent into the year’s beginning endowment value – was unchanged year over year, remaining at 4.4 percent. Educational endowments had five straight years of positive returns prior to FY2008, with four of them being at or close to double digits, as investment returns outpaced policy spending rates. “The strong markets of this period enabled spending in dollars to increase, even as spending rates declined,” Griswold points out. “After the erosion of endowment values over the past 18 months, spending policies may be at an inflection point. The quandary for educational endowments is whether to increase spending rates to make up for the loss of value, or maintain or reduce them out of sheer necessity.” In the nine-year history of the Benchmarks Study, the spending rate peaked at 5.1 percent in FY2002, which marked the latter stage of the 2000-2002 bear market.

The Study categorizes and analyzes data by size of institution and by type: private colleges and universities, independent schools, and public educational systems and their related foundations (“SIRFs,” or state institution-related foundations). The Study also analyzes public educational systems and their SIRFs separately. The combined value of the 628 educational institutions’ endowments was $262.5 billion at June 30, 2008.

Benchmarks Leaders

As in past years, the Commonfund Benchmarks Study Educational Endowment Report also included an analysis of the top decile (top 10 percent) and top quartile (top 25 percent) performers in the overall Study population. The objective of this analysis is to allow educational institutions to gain insight into the practices and policies of their “best of breed” peers.

Top decile institutions in the Study returned 4.7 percent in FY2008, down sharply from 22.6 percent in FY2007, while top quartile institutions returned an average of 2.4 percent, another significant reversal from last year’s 20.8 percent.

While many factors contribute to investment performance, the fact that many of the most successful endowments are very large (having assets over $1 billion) points to the considerable advantages that size offers. Among the most important is the ability of these endowments to manage large and well diversified allocations to alternative asset classes.

Top decile institutions allocated fully 57 percent of their endowment assets to alternative strategies compared with 52 percent a year ago; for the top quartile, the allocation was 54 percent, up from 47 percent. These allocations compare with 46 percent for the Study population overall, which was also up from last year’s 42 percent. Conversely, the Benchmarks Leaders have a significantly smaller allocation to domestic equities and moderately smaller allocations to international equities and fixed income securities. Cash was held to a minimum across the board for all Study participants.

Summary of Other Study Findings

Among other significant findings of the FY2008 Study were these:

Spending

While there was no change in the average spending rate of 4.4 percent since last year’s Study, 38 percent of Study participants did report decreasing their spending rate. Nineteen percent increased their rate, and 41 percent reported no change. Perhaps more important, 69 percent of participating endowments increased their spending in dollar terms. Only 10 percent of participants lowered spending in dollars, while 16 percent left it unchanged. Of those increasing dollar spending, the average increase was 13.8 percent, well in excess of inflation; among those spending fewer dollars, the average decrease was 14.2 percent.

Gifts and Donations

After rising to 50 percent last year, the proportion of institutions reporting an increase in gifts declined to 44 percent this year, while 33 percent reported a decline in giving, up from 27 percent last year. Nineteen percent of participants reported no change, the same as last year.

Viewed in dollars, the average total of new giving to all participants was $10.2 million, up from $8.0 million in FY2007. The higher overall average was entirely driven by the institutions with endowments over $1 billion, where average giving rose to $72.7 million from $66.5 million last year.

Debt

Among Study respondents reporting that they have debt at present, average total debt increased to $109.3 million, continuing a steadily upward trend from $79.8 million in FY2005. Average debt service as a percentage of the operating budget also rose, to 5.6 percent, from 4.9 percent reported last year. Public institutions, which are usually larger, reported average debt of $580.8 million, up sharply from $511.6 million a year ago.

Viewed by size, the increase in average debt was almost entirely attributable to

institutions with endowments over $1 billion. Among these institutions, average debt jumped to an average of $719.6 million from $648.0 million last year and just $555.3 million two years ago. Debt service as a percentage of the operating budget actually declined for this size cohort, however, falling to 4.2 percent from 4.4 percent.

Resources and Governance

For participating endowments, the average number of full-time equivalent (FTE) staff devoted to the investment function declined to 1.2 in FY2008 after three consecutive years of increases that took it to 1.4 a year ago. Sixty-six percent of Study participants use the services of an outside consultant, up from 61 percent a year ago.

The average size of the investment committee among participating endowments has tended to shrink in the past few years. This year, the average investment committee grew slightly to 7.7 members from 7.6 last year. As to investment committee credentials, an average of 4.3 investment committee members were investment professionals, up slightly from last year.

Research Process and Methodology

The review of the 2008 Study and the design of the 2009 Commonfund Benchmarks Study of Educational Endowments took place in the spring of 2008. Field interviews with the participating institutions followed in the second and third calendar quarters of 2008.

Participating institutions were interviewed by telephone, a research technique that assures greater integrity in the data gathering process. Interviewers spoke directly with the ranking business officers at participating institutions.

Data from the overall Study population of 628 institutions were segmented into six size categories to permit analysis of the policies and practices of schools of differing sizes. The six categories were:

• The largest endowments – endowment assets over $1 billion
• Very large endowments – endowment assets between $501 million and $1 billion
• Large endowments – $101 million to $500 million
• Mid-sized endowments – $51 million to $100 million
• Smaller endowments – $10 million to $50 million
• Smallest endowments – under $10 million

As noted earlier, data were also sorted by type of institution: private colleges and universities, independent schools, combined public systems and SIRFs, and public systems and SIRFs as two separate categories.

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About Commonfund Institute

Commonfund Institute was founded to house the education and research activities of Commonfund and to provide the entire nonprofit community with investment information and professional development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. Commonfund Institute provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications including the annual Commonfund Benchmarks Study and the Higher Education Price Index (HEPI); and events such as the annual Commonfund Endowment Institute and the Commonfund Prize for the best contribution to endowment investment research. Its broad range of programs and services are designed to serve financial practitioners, fiduciaries and scholars.

In addition to the Educational Endowment Study, Commonfund Institute conducts Commonfund Benchmarks Studies of foundations, operating charities and nonprofit healthcare organizations.

About Commonfund

Founded in 1971, Commonfund is devoted to enhancing the financial resources of educational and other nonprofit institutions including endowments, foundations, healthcare and service organizations through superior fund management, investment advice, and treasury operations. Directly or through its subsidiaries, Commonfund Capital, Commonfund Realty, and Commonfund Asset Management Company, Commonfund manages approximately $25 billion for approximately 1,900 nonprofit educational institutions, foundations, healthcare and other nonprofit institutions, representing one of the largest pools of educational endowment and operating funds in the world. In response to the growing needs of nonprofit institutions, Commonfund, together with its subsidiary companion organizations, offers more than 45 different endowment investment programs. All securities are distributed through Commonfund Securities, Inc.