Administration January 28, 2010

Study Confirms Tough Year for Endowments

January 28, 2010 (PLANSPONSOR.com) – Final data from the 2009 NACUBO-Commonfund Study of Endowments (NCSE) shows an average return of -18.7% (net of fees) for the 2009 fiscal year ending June 30, 2009.
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The average annual three-year return for institutions participating in the study was -2.5%, while the average annual return for the trailing five years was 2.7%, according to the study results. Over the past 10 years, participating institutions reported an average annual return of 4%.

Study results show that investment returns were negative for all asset classes but two – fixed income (3%) and short-term securities/cash (0.8%). International equities produced the weakest return (-27.6) and domestic equities were not far behind (-25.5%). Alternative strategies returned -17.8%, while short-term securities/cash/other returned -1.5%.

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On June 30, 2009, NCSE survey data indicate that participating institutions’ dollar-weighted asset allocation was:

  • Domestic equities: 18%
  • Fixed income: 13%
  • International equities: 14%
  • Alternative strategies: 51%
  • Short-term securities/cash/other: 4%

Alternative strategies are categorized in the study as follows: Private equity (Leveraged buyouts (LBOs), mezzanine and M&A funds and international private equity); marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives); venture capital; private equity real estate (non-campus); energy and natural resources (oil, gas, timber, commodities and managed futures); and distressed debt.

Within alternative strategies, the asset mix was:

  • Private equity: 21%
  • Marketable alternative strategies: 43%
  • Venture capital: 7%
  • Private equity real estate: 12%
  • Energy and natural resources: 12%
  • Distressed debt: 5%

The average spending rate for educational endowments participating in this year’s study – calculated by dividing endowment dollars spent by the beginning endowment value – was 4.4%. Forty-three percent of study participants reported increasing their spending rate versus 25% that lowered it and 28% that reported no change.

The final data was little changed from preliminary results reported in December (see Endowments Suffer Average Net Loss of 19% in FY 2009).

Endowments' Fund Management and Social Investing

Institutions participating in the NACUBO-Commonfund Study of Endowments reported that the average number of investment managers they use, by asset class, is:

  • Domestic equities: 3.9
  • Fixed income: 2.2
  • International equities: 2.8
  • Alternative strategies (direct): 10.3
  • Alternative strategies (fund of funds): 2.5

On average, institutions employed 1.6 full-time equivalent employees (FTEs) to manage their endowments, but the median number of FTEs, 0.5, may be more indicative of true employment levels.

The institutions reported that it cost 63 basis points, on average, to manage their funds in FY2009. Measured on a median basis, the cost was 53 basis points.

Of the 842 study participants, 178 reported having some form of social investing policy. Of these 178 institutions, 55% screen all of their portfolios, while 34% screen part of the portfolio (11 percent offered no response or were uncertain). Participating institutions most frequently screen to eliminate investment strategies related to tobacco, geopolitical/location-specific concerns, alcohol, gambling, pornography, abortion, and armaments/weapons.

More information can be found at http://www.nacubo.org and http://www.commonfund.org.

Administration January 27, 2010

SEC Draws Attention to Climate Change Reporting

January 27, 2010 (PLANSPONSOR.com) – The Securities and Exchange Commission (SEC) hasn’t taken a position on climate change – but it has offered some new guidance on how firms should take that potential into account in financial reporting.
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The Securities and Exchange Commission today voted – but by a mere 3-to-2 margin, and along party lines – to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.      

The SEC notes that federal securities laws and SEC regulations require certain disclosures by public companies for the benefit of investors, and that occasionally – “to assist those who provide such disclosures”, the SEC provides guidance on how to interpret the disclosure rules on topics of interest to the business and investment communities.  However, it also noted that “the Commission’s interpretive releases do not create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors”.      

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The interpretive release approved today provides guidance on certain existing disclosure rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business – rules that cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis.      

“We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics,” said SEC Chairman Mary Schapiro. “Today’s guidance will help to ensure that our disclosure rules are consistently applied.”

Specifically, the SEC's interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:      

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.      
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.     
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.      
  •  Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.      

The SEC's interpretive release will be posted on the SEC Web site as soon as possible, according to the announcement.

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