Datafile: Challenging Times for the Investment Committee

By Merrill P. Schwartz    //    Volume 20,  Number 2   //    March/April 2012

Governing and foundation boards, working through investment committees, steward the long-term assets and investments of colleges, universities, and institutionally related foundations. The work of these committees is especially difficult during periods of high market volatility or an economic downturn. Colleges and universities were asked by President Obama, in his 2012 State of the Union address, to control college costs and the price of tuition, yet, at the state level, many public institutions face another year of declining appropriations. Investment committees must balance demands for current institutional support with the obligation to preserve the long-term purchasing power of endowments in an environment in which return expectations are below historic levels and risk is high.

How have they fared in the past year and over the ups and downs of the last decade? And, typically, what is the investment expertise of committee members?

As discussed in some depth on pages 32–35, the recently released 2011 NACUBO–Commonfund Study of Endowments (NCSE) provides insights into investment trends and how endowments of various sizes have performed. For the year ending June 30, 2011, endowment returns averaged an impressive 19.2 percent, net of fees, based on data from 823 colleges and universities in the U.S. That’s up from a net return of 11.9 percent in FY2010. (See Table 1.)

The average annual net return of 5.6 percent for the 10-year period ending in FY2011 reflects the roller-coaster ride in equity markets and lower yields in fixed income vehicles. The high net return in FY2011 was offset in these trend data by the bleak years of negative average net returns in FY2009 (-18.7 percent), FY2008 (-3.0 percent), and FY2002 (-6.2 percent). (See Table 1.) Many endowments have barely recovered their pre-2008 value.

Not all colleges and universities have fared the same. According to the 2011 NCSE study, alternative investments have played a part in determining the success of endowment performance over the past decade; larger endowments have been the most heavily invested in these vehicles and have outperformed the others. In FY2011, endowments over $1 billion in value invested an average of 60 percent of assets in alternative strategies, compared to 10 percent in alternatives for endowments under $25 million. Over the past 10-year period, average net returns for the largest endowments (over $1 billion) averaged 6.9 percent, compared with 4.9 percent for the smallest ones (under $25 million).

Committee Composition

In 2011, the average number of voting members of investment committees was about eight, ranging from 9.5 members at institutions with endowments over $1 billion to 6.7 members at institutions with endowments under $25 million. Investment committees of institutionally related foundations had an average of 8.4 members, while those of public and independent governing boards averaged 6.8 and 8.1 members, respectively. Overall, slightly more than half of investment committee members (4.3) were investment professionals, including 2.7 members with alternative investments experience. The average number of investment committee members with professional investment expertise correlated with endowment size, ranging from 8.3 for those with assets over $1 billion to 2.4 for those with assets under $25 million. (See Table 2.) The average number of investment committee members showed little change over the past three years, according to the 2011 NCSE study.

Investment committees should consider their charge and the board’s risk tolerance in weighing investment options and exercising their fiduciary responsibilities. While most institutions and foundations with endowments over $1 billion hire their own chief investment officer (CIO), few colleges and universities with endowment assets under $100 million have a CIO on staff. Investment committees of larger endowments also have more members with professional expertise. Investment committees have to weigh the options of hiring staff to manage investments, hiring an outside CIO, using outside consultants and managers, using a fund-of-funds, and relying on the professional investment expertise of committee members—then make sense of the sometimes conflicting advice they receive.

Common Pitfalls: Asset Allocation Mistakes

Jay Yoder offers wise advice to board members in The Investment Committee (AGB Press, 2011) regarding mistakes to avoid in regard to asset allocation:

  • Avoiding asset classes because of adverse prior experience of individual members (“I lost a bundle on X and we shouldn’t touch it!”);
  • Skewing the asset allocation because of a member’s positive experience (“I’ve never sold a share of X and it’s made me rich!”);
  • Paying more attention to the volatility of individual asset classes versus the volatility of the entire portfolio (leading to an avoidance of “risky” asset classes, but hurting the portfolio’s overall risk-return characteristics); and
  • Ignoring volatility when returns are positive (leading to the assumption of too much risk and causing problems when markets reverse course).

Special Pricing for AGB Members

Visit and create a free My NACUBO account using your institutional email and creating your own password. Once you’ve logged in, under the Distance Learning tab, select the webcast “Understanding the 2012 NACUBOCommonfund Study of Endowments,” and enter AGB Member in the discount box during checkout.


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