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Endowments Are Shifting To Fixed Income

Many non-profit endowments, after years of favoring stocks and being severely damaged by stock market calamities of recent years, are reallocating assets into fixed income.

Many non-profit endowments, after years of favoring stocks and being severely damaged by stock market calamities of recent years, are reallocating assets into fixed income.

“It’s about protecting the principal but it’s also about growth,” says Andrew Lawrence of Lawrence Global Advisors, a New York-based financial advisor to endowments and family offices.  Many of these endowments are discovering that their fixed income allocations are generating real returns.  More important, the cash flow generated by fixed income assets can be used as operating capital, notes Lawrence.

Asset allocation is also a function of market timing, says Lawrence.  Although the reallocation makes financial and economic sense in the current environment, you don’t have to be there forever.

The Chronicle of Philanthropy’s annual study of endowments, which covered 213 endowments with total assets of $340.2 billion  found that many endowments were increasing their allocations to fixed income and cutting back on stocks. The board of the American Heart Association, for example, which has a $48.3 million endowment and another $350 million in operating reserves, voted in June 2009 to raise fixed income allocations 60 percent to 40 percent from 25 percent and cut equities 20 percent to 60 percent from 75 percent.  AHA’s investments, which fell 11 percent in 2008 and 16 percent in 2009, rose 12.1 percent in 2010.

The Chronicle study examined the asset mixes of more than a 100 organizations between 2006 and 2010 and found that these groups had a median of 43 percent of their assets in stocks in 2010.  In 2006, the same groups had a media of 55 percent of their assets in stocks.

The changes were motivated not only by a desire to avoid losses but also how the losses at these endowments are perceived by donors, AHA chief financial officer Sundar Joshi told the Chronicle.  Donors, especially to active causes, want their money to be fully involved in the cause, not diluted by poor investment decisions, Joshi and other say.

Although non-profit endowments manage significant amounts of capital, they have never been under pressure to maximize the return on investment, until recently.  But the market decline of recent years has hurt them on several fronts.  Donors, who often donate a portion of their stock market gains, have drastically cut back on their commitments because of market losses.  And the endowments themselves have seen the value of their assets falls because they always have been overweighted towards stocks.

Many of these endowments have kept their allocations static because they’ve never been under pressure to change says Hemant Baijal managing partner of  Six Seasons Global Asset Management, a New York-based investment manager.  And many in fact have a difficult time deciding between asset classes because there is really no historical basis on which to base asset shifts.

With the problems of equity markets volatility and unpredictability, the case for increasing the allocation to fixed income is greater than ever, notes Michael Purves, chief market strategist and head of global derivatives research at BGC Financial in New York. But if fixed income assets were once seen as low risk, low reward instruments, they now are seen as assets with the potential to deliver real returns, says Purves.

Also, the availability of fixed assets in the emerging markets offers investors safety as well as growth, Purves notes.  Not only has the number of opportunities increased, they also offer greater rewards relative to similar products in the developed markets. “The move to fixed income is not a defensive strategy any more,” says New York’s Andrew Lawrence. “In today’s market conditions they offer relatively outsized returns.”

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