Endowments at day schools and boarding schools favor alternative investments when it comes to allocation strategies, a new report from Commonfund shows.
The report, published Wednesday, focused on the investment strategies at so-called independent schools — private, nonprofit institutions that serve students from kindergarten through 12th grade. The 223 schools participating in the survey managed a total of $12 billion in combined endowment assets.
According to Commonfund’s findings, the schools allocated the most to alternative investment strategies – in total, 33 percent in the fiscal year 2018.
Commonfund conducted the study in conjunction with the National Business Officers Association, a nonprofit focused on independent school financial and operational matters. Independent school endowments returned 7.4 percent from July 1, 2017, through June 30, 2018, according to the report. This was a decline from the previous year, when independent schools posted an 11.8 percent return.
“Independent school endowments remain a key resource that provide schools with critical financial resources that mitigate the need for steep tuition increases and help fund many need-based financial-aid programs,” said Jeff Shields, president and chief executive officer of the National Business Officers Association, in a statement.
He added that the fiscal year 2018 was a “beneficial” one for independent schools.
The 33 percent allocation to alternatives was a small decrease from the previous year, when the schools allocated 35 percent to the strategy.
The largest sub-allocation in the asset class was “marketable alternative strategies,” with an 18 percent allocation. These include allocations to hedge funds, as well as absolute return, market neutral, long/short, 130/30 and event-driven funds and derivatives, according to the report.
According to Cathleen Rittereiser, executive director of the Commonfund Institute, these endowments favor alternative asset allocations because of the so-called illiquidity premium, or the ability to earn higher returns in exchange for locking up their money for longer periods.
“The school endowments are trying to maintain in perpetuity and last over the long term,” Rittereiser said Wednesday. “They can take more long-term risk with their portfolios and lock up their capital for longer periods of time.”
U.S. equities were also popular among the schools: They allocated 28 percent to the strategy for the 2018 fiscal year and 27 percent for the previous fiscal year.
Interestingly, the schools with larger endowments to invest had higher average returns. Those with assets over $50 million reported an average return of 8.2 percent, the report said. Those with between $10 and $50 million returned 7.4 percent, and those with less than $10 million returned 6.2 percent, according to the report.
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The endowments support 6.2 percent of their schools’ operating budgets on average, Rittereiser said.
“Compared to colleges and universities, it’s a much lower average spend,” she added.