Retail investors may have watched in envy in recent years as large institutions brought home double-digit returns from allocations to elite investments, but this year's market turmoil is leveling the playing field.
In spite of significant allocations to hedge funds and other high-octane alternative investments, many endowments and foundations are expected to see flat or negative returns this year, according to experts.
"Everybody across the board has been hit with some element of this liquidity crisis," said Carolyn McLaurin, senior vice president of the non-profit group at SEI Investments Co. of Oaks, Pa., which manages $7.8 billion in assets for 116 non-profit endowments and foundations. "There really wasn't a place to hide."
While alternative investments have long been touted as keys to success, this year, managers learned that not all alternatives are created equal.
"There are a lot of hedge funds that won't perform well or who didn't have good managers," Ms. McLaurin said. "Hedge funds can be risk mitigators and alpha generators. They can also be bombs. They can really be bad with a bad manager. Make sure you are doing a lot of scrutiny, analysis and due diligence."
"We estimate that the median college endowment return will be -4%," said Dick Anderson, director of the higher-education practice at Hammond Associates, a St. Louis firm with $60 billion in assets under management, more than half of which is in endowments and foundations.
"The real differentiator will be real assets, where we saw some double-digit returns like 20% or 25%," he said. "These include commodities, energy, some real estate. They had a terrific year. That was a great place to be."
Hedge funds will also make a difference, Mr. Anderson said.
"There will be a wide dispersion this year, largely dependent upon how much hedge fund exposure you had," he said. "The average hedge fund had flat returns, although there were some good managers on the right side of the credit bet. Hedge funds as a group did not do well."
RIDING HIGH NO MORE
Endowments have posted double-digit returns since 2004, according to a survey of 785 institutions by the National Association of College and University Business Officers, a Washington-based professional organization. It found a one-year average return of 17.2% for fiscal-year 2007, 10.7% for 2006, 9.3% for 2005 and 15.1% for 2004.
But that reign is over.
A recent report from Chicago-based Northern Trust Corp. found that year-to-date returns through June 30 were negative for the third consecutive quarter for its database of 291 funds, which include 90 foundations and endowments with $91 billion in assets.
This is the worst such stretch in more than a decade, said Craig Tome, product manager of Northern Trust risk analysis.
The study also found that during the first half of this year the collective return of endowments and foundations (-4.8%) trumped those of the corporate pension plans (-6.4%) and public pension plans (-5.8%), which make up the other 200 funds in Northern's database. The foundations and endowments had more allocated to private equity than the pension funds.
"They tend to have higher allocations to private equities," Mr. Tome said. "That helped out their returns somewhat."
As of June 30, the average asset allocation to private equity at the database's foundations and endowments was slightly more than 7%, compared with 1% for corporate pension plans and 3.4% for public plans, he said.
The Wilshire Trust Universe Comparison Service, offered by Wilshire Associates Inc., a Santa Monica, Calif.-based investment firm, reported similar results. For the first time since March 2003, the 1,300 institutional plans the program tracks had negative returns for the one-year period ended June 30.
Foundations and endowments with more than $1 billion in assets had a return of -0.60% for the quarter and a one-year trailing return of -3.04%, Wilshire reported.
The median allocations to these funds were 45.2% to equities, 15.2% to bonds, 12.48% to alternative investments, 2.18% to cash, 3.16% to real estate and the remainder to other investments.
On an anecdotal basis, foundations and endowments are experiencing flat to negative returns, said John Griswold, executive director of the Commonfund Institute of Wilton, Conn., which researches nearly 800 endowments of colleges and private independent schools, and about 300 foundations.
"I think you can expect an average of plus or minus 5% for the majority of endowments and foundations. Diversification and use of alternatives has probably saved folks from much worse results," Mr. Griswold said.
"Still, it was a difficult year," he said. "There was no place to hide."
Some larger endowments may have positive returns, such as Harvard University of Cambridge, Mass., which is expected to have returns that range from 7% to 9%, according to published reports not confirmed by the university. The university reported this year that 33% of its endowment's holdings were in real assets.
"I think you can expect Yale [University of New Haven, Conn.] to be positive again and many of the large universities, which have a heavy allocation to private-capital investments and commodities," Mr. Griswold said. "But for those who came into commodities only recently, they may have found it disappointing."
"Thus far, 2008 has been a horrific year as it relates to the markets in general, and there are only a few asset classes that have held their own and/or even done well," said Yale Levey, managing director at Next Generation Wealth Planning LLC, a Roseland, N.J., firm with $65 million in assets under management.
"This is why it's important to diversify and have exposure to non-correlated asset classes as well as more traditional asset classes," said Mr. Levey, who also is a board member of the International Association of Advisers in Philanthropy of Rocky Hill, Conn.
E-mail Sue Asci at email@example.com.