U.S. HIGHER EDUCATION ENDOWMENTS AND FOUNDATIONS REPORT AVERAGE RETURNS OF 10.6 PERCENT IN FISCAL YEAR 2006, UP FROM 9.7 PERCENT LAST YEAR

WILTON, CT, JANUARY 10, 2007 – U. S. educational endowments earned increased returns in Fiscal Year 2006 according to the 2007 Commonfund Benchmarks Study® of Educational Endowments (CBS), which polled 741 private college and university endowments, independent school endowments, public system funds and state institution-related foundations (SIRFs). All educational endowments and foundations reported average annual total returns of 10.6 percent in Fiscal Year 2006, up from average annual total returns of 9.7 percent reported for FY2005, 14.7 percent for FY2004, 3.1 percent for FY2003, -6.0 percent for FY2002, and -3.0 percent for FY2001. Benchmarks Leaders – endowments placing in the top decile and top quartile of Study participants in terms of FY2006 investment returns – reported returns in excess of 16.8 percent and 14.8 percent, respectively, up from 16.1 percent and 13.9 percent the previous year. Private endowments, which are typically characterized by large asset bases, long experience with alternative investing and greater access to top-performing managers, made up more than three-quarters of the top decile. Returns are net of fees.

Private institutions reported average returns of 11.2 percent in FY2006, public institutions reported returns of 10.1 percent and independent schools reported the lowest average returns of 9.6 percent. Average three- and five-year returns for all participants were 12.3 percent and 6.8 percent, respectively, up from 9.6 percent and 3.5 percent the previous year. While FY2006 returns increased for institutions of all sizes, the largest institutions (assets over $1 billion) reported significantly higher three- and five-year returns of 15.1 percent and 8.8 percent, while institutions with under $10 million in assets reported three-year returns of 10.1 percent and five-year returns of 5.9 percent. For the first time, 2007 CBS divides public institutions into two groups: public system funds and state institution-related foundations (SIRFs). Private institutions reported three- and five-year returns of 12.7 percent and 7.2 percent respectively; independent schools reported returns of 11.4 percent and 6.5 percent; and public institutions, as a whole, reported returns of 12.1 percent and 6.4 percent. SIRFs reported average FY2006 returns of 10.0 percent, three-year returns of 12.1 percent and five-year returns of 6.4 percent.

“Endowments’ improved performance in 2006 shows a clear correlation between size, best practices and superior returns, large institutions having many advantages over smaller endowments,” said John S. Griswold, Executive Director, Commonfund Institute. “The 2007 CBS shows endowments are moving strongly toward covering their spending needs and inflation costs with higher allocations to certain alternative assets, and increased sophistication in alternatives, especially among the Benchmarks Leaders. Institutions with the highest returns had larger than average allocations to international equities and alternative strategies, and broader diversification within alternatives than other participants. The best performers made higher total allocations to private equity real estate, energy and natural resources and lower allocations to hedge funds.”

Long-term return expectations among participants averaged 8.2 percent for FY2006, up from 8.0 percent the previous year. More than 30 percent of the largest institutions reported return expectations over 9.0 percent, and more than 80 percent of institutions with assets between $501 million to $1 billion reported return expectations exceeding 8.0 percent.

Asset Allocation
Average asset allocations showed modest declines in domestic equity and fixed income and increases in alternatives and international equity, which was the top performing traditional asset class. Overall allocations in FY2006 for all respondents were: domestic equity (26 percent vs. 28 percent the previous year), fixed income (13 percent vs. 16 percent), international equity (20 percent vs. 18 percent), alternative strategies (39 percent vs. 35 percent) and cash/short term (2 percent vs. 3 percent).

Top decile respondents’ domestic equity allocations fell to 18 percent vs. 20 percent, and top quartile performers reduced domestic equity to 21 percent vs. 22 percent. Active strategies accounted for 79 percent of domestic equities for all participants, and indexed equities (passive/enhanced) were 21 percent for all participants vs. 20 percent in FY2005, 22 percent vs. 29 percent for top decile, and 21 percent vs. 23 percent for top quartile respondents. Domestic equity returns averaged 10.2 percent in 2006.

Benchmarks Leaders reduced domestic fixed income allocations to 11 percent vs. 15 percent. Within fixed income, domestic holdings were 79 percent active strategies and 11 percent passive. International bonds represented 10 percent of fixed income assets for all participants; 13 percent for top quartile and 15 percent for top decile respondents.

International equity was the top performing traditional asset class in FY2006 with an average return of 24.7 percent, and its asset allocation increased to 20 percent vs. 18 percent the previous year. Top decile performers allocated 36 percent of international equity assets to emerging markets, vs. 27 percent for all institutions. Within international equity for all respondents, active MSCI ex-U.S. was 68 percent of assets vs. 66 percent the previous year, and passive/index MSCI ex-U.S. was just 5 percent of assets, unchanged from the previous year.

The proportion of participants rebalancing their portfolios declined slightly to 72 percent vs. 74 percent the previous year, but was still within the roughly two-thirds to three-quarters of participants that have reported regular rebalancing every year since CBS’s inception.

The majority of CBS participants do not plan to make substantial revisions in current allocations in FY2007, and changes that are expected generally represent continuations of trends started in prior years. Twenty-three percent of total institutions expect to decrease domestic equity allocations and 13 percent plan cuts in fixed income, while 27 percent of respondents expect to increase allocations to alternative strategies. Among institutions with assets between $501 million and $1 billion, nearly 65 percent expect to cut domestic equity allocations, and 56 percent expect to increase alternatives. Nearly 30 percent of all public institutions plan to reduce allocations to domestic equities, and 33 percent plan to increase allocations to alternatives.

Alternatives allocations drive returns
Endowments continued to increase alternative strategies in FY2006. Alternatives allocations for total participants increased to 39 percent vs. 35 percent the previous year, at the expense of domestic equity and fixed income. Institutions able to manage lower levels of liquidity in their portfolios outperformed those that require greater liquidity. The impact of higher average allocations to alternative strategies among the largest participants is clear: for institutions with assets between $500 million and $1 billion, 79.1 percent of endowment growth resulted from investment returns and for institutions with more than $1 billion, more than 75 percent of endowment growth. This compared with 71 percent endowment growth from investment returns for total participants.

Overall returns for alternative strategies averaged 14.6 percent, led by energy and natural resources with 39.9 percent, distressed debt with 26.2 percent, public equity real estate with 19.1 percent, private equity with 18.9 percent and private equity real estate with 15.5 percent. Hedge fund returns averaged 10.6 percent. Allocations to alternative strategies correlated closely with the size of institution funds – a finding that helps explain why returns and endowment size are likewise correlated.

Asset mix within alternatives portfolios remained largely stable from FY2005 to FY2006. However, there was a continued drop in hedge fund allocations to 46 percent in FY2006 vs. 47 percent and 48 percent in FY2005 and FY2004 respectively. There were increases in allocations to private equity real estate (13 percent vs. 12 percent the previous year) and energy and natural resources (14 percent vs. 13 percent). Private equity was unchanged from 14 percent the previous year; venture capital was also stable at 7 percent; public equity real estate remained unchanged at 3 percent; and distressed debt declined to 3 percent in FY2006 from 4 percent in FY2005.

Benchmarks Leaders: size, best practices and alternatives allocations produce higher returns
Analysis of the Benchmarks Leaders, including top decile (68 institutions) and top quartile (180 institutions), reveal that their higher returns were due to significant differences in their size, use of best practices, and asset allocations in FY2006 compared with total institutions. Benchmarks Leaders are mostly large institutions that have better access to select alternatives managers who consistently deliver the best returns but are often closed to new investment. They generally have larger staffs, greater resources and more experienced investment committees. They also show a greater degree of diversification in alternatives than smaller endowments.

Among the top decile institutions, there were higher than average allocations to alternative strategies, but lower than average allocations to hedge funds compared with total institutions. Top decile performers had marketable alternatives allocations of only 40 percent vs. 46 percent for total institutions, and higher allocations to energy & natural resources with 18 percent vs. 14 percent for total institutions, and private equity real estate with 17 percent vs. 13 percent for total institutions.

Spending Rates decline but dollars up
The average spending rate declined for the fifth consecutive year to 4.5 percent vs. 4.6 percent in FY2005, 4.8 percent in FY2004, 4.9 percent in FY2003, and 5.1 percent in FY2002. This decline was due largely to an increase in overall investment returns and market values, net of spending. However, 18 percent of participants said their spending rate increased in FY2006 vs. 13 percent in FY 2005. Increased market values allowed more than two-thirds of respondents to increase their spending in dollar terms from FY2005 to FY2006, as compared with 49 percent and 35 percent of respondents in the past two years. For participants that reported increases in available dollars, the average increase was 12.9 percent. Institutions can expect additional increases in spending dollars in FYs 2007-2008 as current market values replace the lower market values of previous years and are used to compute spending formulas.

Most of the decline in spending rates was due to reductions among the smallest institutions with assets of $10 million or less, which reported an average spending rate of 3.6 percent. The average spending rate remained the same or increased modestly for institutions with endowment assets above $10 million from the previous year. Some 78 percent of participating institutions with more than $500 million in assets reported an increase in dollars for spending due to higher investment
returns. Unlike investment returns, spending rates do not appear to be closely correlated with the size of endowment assets.

Nearly two-thirds of participants increased their FY2006 operating budgets, which averaged $171.7 million across all study participants. Institutions with more than $1 billion in endowment assets reported operating budgets exceeded $1.5 billion. Public institutions had a more favorable operating environment due to improvements in endowment market values and increased state support. Twenty-three percent of participants reported they used the Higher Education Price Index*, up from 19 percent in FY2005 and 14 percent in FY2004.

Gifts
Gifts to endowments remain an important source of asset growth for CBS participants. In contrast to investment returns, gifts add to asset growth every year and are the source of future endowment growth for almost all institutions. Gifts declined in dollar terms from FY2005 to FY2006, and as a percentage of new endowment assets in most institution size categories. Total average gifts to endowments at participating institutions declined to $7.2 million in FY2006 vs. $7.9 million the previous year despite a year-to-year increase in average total gifts among smaller institutions. This compared with total average gifts of $6.7 million in FY2004, and $6.9 million in FY2003.

However, approximately 6.2 percent of the growth in respondents’ total assets in FY2006 was due to gifts, an increase from 5.4 to 5.5 percent reported in the three previous years. Overall, gifts in FY2006 accounted for a bigger portion of endowment growth for smaller institutions than they did among larger institutions. The percentage of participants’ operating budgets funded by annual giving declined to an average 7.1 percent in FY2006 vs. 7.5 percent the previous year. The typical institution with more than $1 billion in assets received more than $60 million in gifts.

* NOTE: Commonfund acquired The Higher Education Price Index (HEPI) in 2004, and issued a revised HEPI in the spring of 2005.

Debt Levels
Overall, 30 percent of institutions report having increased debt in FY2006 vs. 33 percent the previous year. The average total debt reported was $87.1 million, up from $79.8 million in FY 2005. Forty-three percent of total respondents decreased debt, while 66 percent of public institutions increased it. Large institutions tended to take on additional debt while smaller institutions on average reduced it. The rising interest-rate environment in FY2006 contributed to an increase in the use of interest-rate swaps among CBS participants.

The percentage of institutions reporting underwater funds declined in FY2006. Twenty-eight percent of CBS institutions reported holding underwater funds, vs. 33 percent the previous year, 44 percent in FY2004 and 54 percent in FY 2003.

Underwater funds are individual restricted endowment funds with current market values that have declined below their historic dollar value at the date of the gift. In many states, endowments cannot legally spend from these underwater funds, which must be restored to historic dollar value by investment returns before normal spending may resume. The newer the endowment fund, the more likely it is to fall below its historic dollar value since these lack a “cushion” of accumulated capital gains. The problem of underwater funds will continue to diminish if equity markets remain strong, and would be eliminated altogether in many states by the passage of UPMIFA, the proposed Uniform Prudent Management of Institutional Funds Act, which does away with the concept of historic dollar value in favor of a “prudent investor” approach.

Interviews for the 2007 Commonfund Benchmarks Study® were conducted during the third and fourth quarters of 2006, and reflect responses of 741 institutions for Fiscal Year 2006. For more than 80 percent of the Study participants, this fiscal year ended on June 30.

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.

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 $38 billion for more than 1,600 nonprofit healthcare, educational institutions, foundations, 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 including funds for the management of short- and intermediate-term operating cash reserves. All securities are distributed through Commonfund Securities, Inc.  www.commonfund.org.

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