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Endowments and foundations to increase exposure to alternatives — Survey

Endowments and foundations generally are paring back allocations to U.S. equities and fixed income in favor of a range of alternative assets, according to a new survey from NEPC. Specifically, 40 percent of respondents said they plan to raise allocations to hedge funds and real assets, 32 percent plan to increase exposure to private equity and 33 percent plan to escalate exposure to private debt.

Press Release

NEPC, LLC (www.nepc.com), one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations, today made public the results of its inaugural NEPC Poll, a measure of endowment and foundation confidence and sentiment related to the economy, investing and market performance.

“Interestingly, against this backdrop of economic approval and robust market performance, results show endowments and foundations are paring back on their allocations to US equities and fixed income in favor of a range of alternative assets.”

“Generally speaking, we found that senior investment professionals at endowments and foundations are feeling reasonably sanguine about the state of the US economy, with 86% noting it’s in a ‘better or the same place as this time last year,’ and they’re similarly satisfied with their organization’s 2014 financial prognosis,” said Cathy Konicki, Partner and Head of NEPC’s Endowment & Foundation Practice Group. “Interestingly, against this backdrop of economic approval and robust market performance, results show endowments and foundations are paring back on their allocations to US equities and fixed income in favor of a range of alternative assets.”

By the Numbers

When asked which asset class exposures they plan to change in 2014, respondents overwhelmingly indicated a desire to increase their alternative investments exposure. Specifically, roughly 40% said they plan to raise their allocations to hedge funds and real assets, 32% plan to increase their share of private equity, and 33% will escalate their private debt investments.

Conversely, 46% of respondents plan to decrease their domestic fixed income exposure, while 28% will cut their domestic equities and 13% plan to reduce emerging market debt exposure.

When asked about confidence in their organizations’ ability to comfortably meet investment return objectives for FY 2014, 61% of respondents said they’re “highly” or “moderately” confident. Looking three years out, however, the picture changes dramatically, with 73% of respondents indicating they were “not confident at all” or “somewhat confident” about meeting return objectives.

Asked which single event poses the greatest threat to investment performance over the near term, 60% of endowments and foundations noted “slowdown in global growth.” In second place (33%) was “US budget deficit/government shutdown,” and in a distant third position (4%), “rising interest rates.”

As it relates to mitigating interest rate risk in their portfolios, 44% of endowments and foundations have “reduced fixed income allocations,” 35% added “less constrained mandates,” and 7% added an “overlay strategy.”

Not surprisingly, 73% of respondents said “lower than expected market returns” posed the greatest risk to their investment programs over the long-term, followed by “loss of value,” (16%), and “inflation,” (11%).

This year has been reasonably good from a fund raising standpoint, with 37% saying that giving increased over 2012, and 42% noting that giving is on par with the previous year.

Investment management fees for respondents appear to be fairly consistent with industry norms, with 33% of endowments and foundations noting that fees range from “.75% – 1.00%,” 29% indicating a range of “.50% to .75%,” and 20% indicating a range of “1.00% to 1.25%.”

About the Study

The NEPC Poll was conducted online by NEPC’s Endowments & Foundations Practice Group in November 2013. Results are based on responses from 46 endowments and foundations. The study’s copyright is held by NEPC.

About NEPC

NEPC® is an independent, full service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with institutional investment programs and high net worth clients on both an advisory and discretionary basis.

The Endowment & Foundation Practice services 95 Endowment and Foundation retainer relationships, representing assets of $48 billion, from offices in Atlanta, Boston, Charlotte, Chicago, Detroit, Las Vegas and San Francisco. Learn more at http://www.nepc.com/ and http://www.nepc.com/clients/endowments_foundations.