Commonfund Benchmark Studies 2008

Commonfund Benchmarks Study
Educational Endowment Report
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
February 2008
The data from the record 767 educational institutions participating in the 2008 Commonfund
Benchmarks Study of Educational Endowments should be gratifying to financial officers and
investment committees. Net investment returns ranged from 13.6 percent for the smallest
institutions to 21.0 percent for the largest, with an average of 16.9 percent overall. These are
the highest returns in the eight years that we have conducted the Study, and represent the
fifth consecutive year of positive performance. Average spending rates ranged from a low of 3.4
percent to a high of 4.6 percent, with an average of 4.4 percent, as strong investment returns
enabled dollar spending to increase. Asset allocations showed changes in this years Study that
extended trends observed in past years, but they were subtle, perhaps indicating a pause in
secular asset allocation moves.
The investment performance generated by the largest endowmentsthe 100 participants

with more than $500 million in assetscontinues to separate them from their smaller coun-
terparts. But, while large endowments enjoy certain structural advantages, smaller endow-
ments can emulate many of their investment and governance practices and, in particular, may
benefit by studying the investment policies of the Benchmarks Leaders, which are reviewed
on pages 1319.
We wish to acknowledge and thank our friends at the participating institutions for their
valuable contributions. We know that your time is valuableall the more reason for us to
express our thanks. The data and comments provided by professionals and volunteers at these
institutions allow us to compile and share with readers the most accurate and comprehensive
data on the endowment sector, against which all educational institutions can benchmark their
own performance and practices.
Thanks to the in-depth interviews conducted with these institutions over the years, we have
also been able to construct a rich database that can be used to create custom benchmark
reports tailored to individual institutions a service that we are told is highly informative.
We encourage Study participants to contact their Commonfund Relationship Officer to
request a custom benchmark report. (You may also contact your Commonfund RO for
additional copies of this years Study.)
We are, once more, indebted to the talented individuals who make up our Advisory Board.
Their expertise provides this report with a level of insight that would be impossible to achieve
without their participation.
As always, we welcome your comments and look forward to your participation in future Studies.
Sincerely,
John S. Griswold
Executive Director
Commonfund Institute
Table of Contents
Chapter 1 The Commonfund Benchmarks Study

of Educational Endowments 10
Introduction 10
The Benchmarks Leaders 13
Asset Allocation 15
Chapter 2 Returns and Asset Allocation 20

Investment Environment 20
Returns 21
Long-Term Returns 24
Overall Asset Allocations 26
Investments in Domestic Equities 28
Investments in Fixed Income 28
Investments in International Equities 29
Investments in Alternative Strategies 30
Portfolio Rebalancing 31
Expected Changes to Asset Allocations 33
Marketable Alternative Strategies 34
Viewpoint 38
Asset Allocation, Risk and Liquidity in Perpetual Portfolios 38
Chapter 3 Spending 41
Spending Trends 42
Special Appropriations 46
Operating Budgets 48
Higher Education Price Index (HEPI) 51
Chapter 4 Gifts 53
Gifts and Donations 54
New Gifts to Endowment 56
Development Program Costs 57
Foundation Investment Pool Assets 61
Underwater Funds 61
Chapter 5 Debt 64
Debt Load 64
Debt Policies 67
Response to Current Interest Rate Environment 68
Chapter 6 Resources, Management and Governance 69

Manager Use 70
Cost of Managing Investment Programs 72
Professional Staffing 74
Changes to Staffing 77
Investment Committees 78
Conflicts of Interest 81
AICPA Guidelines 82
Appendices IIV 85
I: About Commonfund Institute 85
II: Type of Fund Tables 87
III: Participating Educational Endowments 107
IV: Glossary of Terms 117
List of Figures
1.1 Commonfund Benchmarks Institutions by Size 2.7 Asset Allocations for Fiscal Years 2005, 2006
1.2 Commonfund Benchmarks Institutions by Type and 2007
1.3 Top Decile and Top Quartile Performers by Size 2.8 Domestic Equity Asset Mix for Fiscal Year 2007
1.4 Top Decile and Top Quartile Performers by Type 2.9 Fixed Income Asset Mix for Fiscal Year 2007
1.5 Average Returns for Total, Top Decile and 2.10 International Equity Asset Mix for Fiscal Years
Top Quartile Performers 2006 and 2007
1.6 Asset Allocations for Total, Top Decile and 2.11 Alternative Strategies Asset Mix for Fiscal Year 2007
Top Quartile Performers for Fiscal Years 2005, 2006 2.12 Portfolio Rebalancing for Fiscal Years 2006
and 2007 and 2007
1.7 Domestic Equity Asset Mix for Total, Top Decile 2.13 Portfolio Rebalancing Frequency for Fiscal
and Top Quartile Performers for Fiscal Year 2007 Year 2007
1.8 Fixed Income Asset Mix for Total, Top Decile and 2.14 Expected Changes to Asset Allocations
Top Quartile Performers for Fiscal Year 2007 2.15 Use of Marketable Alternative Strategies for
1.9 International Equity Asset Mix for Total, Top Fiscal Year 2007
Decile and Top Quartile Performers for Fiscal 2.16 Marketable Alternative Strategy Allocation for
Years 2005, 2006 and 2007 Fiscal Year 2007
1.10 Alternative Strategies Asset Mix for Total, 2.17 Performance Expectations for Marketable
Top Decile and Top Quartile Performers for Alternatives Portfolio
Fiscal Year 2007
2.18 Satisfaction with Due Diligence/Monitoring of
Marketable Alternatives Managers
2.1 Average Annual Total Return for Total Institutions
for Fiscal Years 20002007
3.1 Average Annual Spending Rates for Total
2.2 Average Return by Asset Class for Fiscal Year 2007 Institutions for Fiscal Years 20002007
2.3 Growth From Investment Returns 3.2 Average Annual Spending Rates for Fiscal Years
2.4 Average One-, Three- and Five-Year Returns 2005, 2006 and 2007
2.5 Long-Term Return Objectives 3.3 Changes to Spending Rates for Fiscal Years
2.6 Asset Allocations for Total Institutions for 2006 and 2007
Fiscal Years 20002007 3.4 Changes to Spending Dollars for Fiscal Years
2006 and 2007
Throughout the report text, data are presented for the total 767 institutions or by size of fund. Data arrayed by type of fund for
the corresponding tables may be found in Appendix II bearing the same Figure number.
Data are generally reported by fiscal year (FY2000FY2007) with the exception of questions specifying Study year data. In these
cases, the Study year data are reported and identified as such.
3.5 Spending Policy for Fiscal Year 2007 5.1 Debt Levels for Fiscal Year 2007
3.6 Include Future Gifts When Establishing 5.2 Changes to Debt in Fiscal Year 2007
Spending Policy 5.3 Plan to Significantly Increase Debt in Next
3.7 Special Appropriations to Spending in Fiscal Two Years
Year 2007 5.4 Have Formal Debt Policy
3.8 Importance of Principles Underlying 5.5 Use of Interest Rate Swaps to Manage Exposure
Investment Policy
3.9 Average Operating Budget for Fiscal Year 2007
6.1 Average Number of Separate Investment Firms
3.10 Changes to Operating Budget for Fiscal Year 2007 Used in Fiscal Years 2005, 2006 and 2007
3.11 Percentage of Operating Budget Funded 6.2 Average Number of Managers Used by Asset Class
by Endowment in Fiscal Years 2006 and 2007
3.12 How Institutions Use the Higher Education 6.3 Direct Investment in Marketable Alternative
Price Index (HEPI) Investments and Number of Marketable Alternatives
Managers Used in Fiscal Years 2006 and 2007
4.1 Changes in Gifts and Donations for Fiscal 6.4 Cost of Managing Investment Programs for Fiscal
Year 2007 Year 2007
4.2 Average Total Amount of New Gifts to Endowment 6.5 Included in Cost Calculations
for Fiscal Years 2005, 2006, and 2007 6.6 Professional Staffing of Investment Function for
4.3 Percentage of Operating Budget Funded by Annual Fiscal Years 2005, 2006 and 2007
Giving For Fiscal Years 2005, 2006 and 2007 6.7 Composition of Professional Staff
4.4 Cost of Development Program, Including Capital 6.8 Consultant Use
Campaign Costs
6.9 Consultants Conflict of Interest Policy
4.5 Funding of Development Programs
6.10 Changes to Staffing in Fiscal Year 2007
4.6 Funding of Capital Campaigns
6.11 Average Number of Voting Members on Investment
4.7 Foundation Investment Pool Assets Committee for Fiscal Years 2005, 2006 and 2007
4.8 Institutions Reporting Underwater Funds for 6.12 Investment Committee Credentials for Fiscal Years
Fiscal Years 2005, 2006 and 2007 2006 and 2007
4.9 Percentage of Endowment Underwater for Fiscal 6.13 Conflict of Interest Policies
Years 2005, 2006 and 2007
6.14 Steps Taken to Satisfy AICPA Guidelines
Concerning Fair Valuation of Illiquid Holdings
How to Read This Report
Since the Commonfund Benchmarks Study of Educational Endowments (CBS) was begun
in 2001, each year has seen the addition of more participating institutions, new areas of
topical inquiry and refinements to the analyses of the data. As readers and users of the Study
may recall, we introduced a number of typographical, layout and color enhancements last
year to make the Study easier to read and use for reference and comparison.
Among these changes were the introduction of color coding to figures illustrating research results
by size cohort, based on the endowment size of responding institutions. As the figure below
illustrates, each size cohort is assigned its own color, which remains consistent throughout the
entire report. The purpose of this addition is to assist readers in locating the size category
relevant to their own institutions and finding the appropriate benchmark data.
FIGURE 2.8
Domestic Equity Asset Mix for Fiscal Year 2007

Numbers in Percent (%)
$501 $101 $51 $10 Under

Total Over Million $500 $100 $50 $10
Institutions $1 Billion $1 Billion Million Million Million Million
Responding institutions 656 47 38 179 91 215 86

The report also presents results arrayed by type of institution, by private (college and
university endowments), independent (school endowments), public system funds and state
institution-related foundations (SIRFs) categories, as illustrated in the example below.
Throughout the report, we point out instances in the text where there are meaningful differ
ences among responses provided by different types of institutions. A full set of charts and
tables by type of institution is included in Appendix II at the end of the report. These figures
provide readers with another important data set for use in benchmarking individual institu-
tions against their peers.
FIGURE 2.8A
Domestic Equity Asset Mix for Fiscal Year 2007

Total
Institutions Private Independent All Publics Public Only SIRF
Responding institutions 656 317 183 156 48 108
Commonfund Benchmarks Study 2008 Educational Endowments

Research Process and Methodology
The design of the 2008 Commonfund Benchmarks Study took place in the spring and
early summer of 2007. Field interviews with the 767 participating institutions followed in
the third and fourth calendar quarters of 2007.
Participating institutions were interviewed by telephone, a research technique that assures

greater integrity in the data gathering process. Interviewers spoke directly with the ranking
business officers at participating institutions, and their responses to our questions provide both
the quantitative data and qualitative commentary that form the basis of this report. Further,
an asset allocation worksheet was completed by all Study participants.
The distribution of the 767 institutions across type and size was designed to produce data that
are statistically representative across the full sample. This aspect of the research design is
crucial in that it underlies the ability to benchmark a particular institution against true peers.
It is equally important, in terms of the stability of the data, that even as the Study has grown,
a full 86 percent of the institutions in this years 2008 Study were participants in the 2007
Study. (Last year, 741 institutions participated while 729 took part the year before that.)
It should be noted here that apparent changes in the demographics of Study participants
can be misleading. Changes from year to year can reflect fluctuations in portfolio values and
lead to the reclassification of institutions into larger or smaller size categories.
Endowment professionals and board members using this report should note that year-over-
year comparisons of data have been presented in all areas where the inquiries were consistent.
Where modifications were made to the questions asked, or where new areas of inquiry were
introduced to the Study, only one years data have been presented. However, we caution users
of the Commonfund Benchmarks data that any trend presented in this report should be
interpreted only directionally as an indication of change.
Commonfund Institute prepares a number of companion Benchmarks Studies. Our Canadian

Educational Endowment Study and the NBOA/Commonfund Annual Endowment Study
examine specific types of educational institutions. Others, such as our Studies on foundations,
operating charities and healthcare organizations, examine other types of nonprofit organi
zations. In addition to these annual Studies, Commonfund produces custom benchmark
reports upon request. To order a custom benchmark report, contact your Commonfund
Relationship Officer.

Frequently Asked Questions
How does Commonfund calculate three-year and five-year investment returns
for participating institutions?
We dont. Each year we ask our Study participants to provide their own three-year and
five-year returns, and we report average responses. In short, these returns are reported,
not derived.
If there are 767 institutions participating in the Study, why does the Top Decile
include only 72 institutions and the Top Quartile 181 institutions? Shouldnt it
be 77 and 192?
Of the 767 institutions participating in this years Study, 94 percent or 719 institutions
provided return data for the most recent fiscal year. Top decile and top quartile are
defined as the top 10 percent of these institutions (72 in number) and 25 percent of total
participants (181 in number, slightly more than 25 percent owing to institutions with
the same return, i.e., ties).
What is dollar-weighted?
Dollar-weighted means that individual responses are weighted according to size or asset
base when calculating average resultsmeaning that responses from large participants have
a greater impact on average results than those of smaller participants. By contrast, when
overall results are calculated on an equal-weighted basis, each response has an equal impact
on the average, regardless of the size of the respondent. Unless otherwise noted, asset allo
cation figures in this Study are dollar-weighted. Selected tables showing equal-weighted data
may be found in Appendix II.
Why do the bases (or number of respondents) change between Figures?
Unless otherwise noted, responses come from the full set of 767 Study participants.
Responding Institutions indicates that the responses come from a subset of participants.
For example, in Chapter 2, Figure 2.13, which depicts the frequency with which
schools rebalance their portfolio, shows that the total number of respondents to this
question (the Total Institutions column header) was 557.
Are all the data reported as averages?
Most, but not all. The majority of the figures and most of the related commentary present
data as the average value (the arithmetic mean, calculated by adding all the observations
and dividing by the number of observations). However, some commentary and a few figures
present median data. As differentiated from the mean or average, the median is the middle
value, or data point in the middle. That is, half of the data points are above the median and
half below. The median can be useful in smoothing out infrequent, but extremely high
or low, data points that can skew the average.

Acknowledgments
Commonfund Institute wishes to thank the following for their significant contributions to this
eighth annual Commonfund Benchmarks Study of Educational Endowments.
England Associates, Inc.

Our research partner for the eighth year in this initiative, England Associates, Inc. has provided
leadership and project management throughout the Studys design, development, fielding and
analysis. An independent proprietary research firm serving the needs of financial services clients for
custom strategic and market research, England Associates and its entire team have our thanks
for their continued vision and efforts in creating this valuable tool for our client institutions.
Riverside Associates, Inc., The Markets Group

Riverside Associates, Inc. joins the team for the sixth year to field the Commonfund Benchmarks
Study Educational Endowment Report. Riverside Associates is an invaluable partner in the
research design and the interviewing of more than 750 participating institutions, and we wish
to thank them for the professionalism and expertise they brought to this years research.
We are also indebted to the 767 participating institutions, many of them providing data for the
eighth consecutive year. The interviews that we conduct with them provide the foundation of the
2008 Commonfund Benchmarks Study Educational Endowment Report. Be assured that we
review each prior years Study very carefully and design the next years questionnaire so as to focus
on relevant, timely and important data while being mindful of participants valuable time.
Chapter 1 The Commonfund Benchmarks Study

of Educational Endowments
Introduction
With an average return of 16.9 percent for the fiscal year ended June 30, 2007, the record
767 institutions representing a combined $341.3 billion in endowment assets that
participated in the 2008 Commonfund Benchmarks Study of Educational Endowments
enjoyed the best performance since the Studys inception in 2000.
This positive investment environment enabled participating institutions to continue

increasing their dollar spending even as spending rates, which averaged 4.4 percent overall
and ranged from 3.4 percent to 4.6 percent, declined slightly.
Despite the jump in average returnsfrom 10.6 percent last yearthe data indicate that
FY2007 was for the most part a period of moderate change. Relatively minor changes in asset
allocation from FY2006 suggest that the shift from traditional stocks and bonds into
alternative strategies may have slowed. Similarly, in matters of investment management and
governance, the data show that the year was one of evolutionary change rather than
revolutionary breaks from the past.
Among recently added areas of inquiry, we continue to focus on marketable alternatives and
performance expectations, as well as on governance, staffing needs, outsourcing and steps taken
to satisfy the fair valuation guidelines promulgated by the American Institute of Certified
Public Accountants (AICPA) in 2006. Among new areas of inquiry, this years report offers
data about the costs of development programs and capital campaigns.
We are continuing to make greater use of the qualitative comments we receive during
the course of live interviews with respondents. We believe these add nuance and interpretive
value to the narrative.
10 Commonfund Benchmarks Study 2008 Educational Endowments

Once again, the data reveal significant differences in practices and policies among educational
endowmentsdifferences delineated both by size of investment fund and by type of institution.
As in previous editions of the Educational Endowment Report, participating institutions are
segmented by size into six cohorts ranging from those with endowment assets over $1 billion
to those with less than $10 million. The tables and narrative in the Studys six chapters gen
erally address data arrayed by size. However, when data analyzed by type of institution reveal
significant findings the narrative brings this fact to the readers attention. (A full set of data
tables arrayed by type of institution is presented in Appendix II.)
For the fifth consecutive year, the Study also reports and comments on the practices and
policies of the Benchmarks Leaders, which are those institutions whose investment returns
place them in the top decile and top quartile of all Study participants.
The Study and its seven predecessors are sponsored by Commonfund Institute, which was
founded in 2000 to house Commonfunds research, educational and related professional
activities. As always, we remain indebted to the professionals at participating institutions whose
time and data provide the foundation of the Study. The next two Figures (1.1 and 1.2) show
the distribution of Study institutions by size and by type.
FIGURE 1.1
Commonfund Benchmarks Institutions by Size
Study Year 01 02 03 04 05 06 07 08
Largest Total assets over $1 billion 32 32 24 29 35 40 45 56
Very large Total assets between $501 million $1 billion 42 38 38 43 38 42 45 44
Large Total assets between $101 $500 million 159 181 183 182 200 197 202 210
Mid-size Total assets between $51 $100 million 82 102 104 86 100 104 107 106
Small Total assets between $10 $50 million 144 166 193 221 237 255 238 246
Smallest Total assets under $10 million 104 98 95 96 97 91 104 105
Total Institutions 563 617 637 657 707 729 741 767
The 2008 research universe is composed of 767 institutions, up from 741 in 2007. A full
86 percent of this years participants were also participants in the 2007 Studya fact that adds
stability to the research and facilitates reliability in year-to-year comparisons.
This years Study includes 56 of the nations largest endowments those with funds in
excess of $1 billion up from 45 last year. The assets of these institutions make up over
$238 billion, or 70 percent of the total assets represented in the survey. In addition to
influencing the market through their sheer size, these colleges and universities also tend
to drive innovation in the endowment sector and, in many ways, among the broader
institutional investor community.
Commonfund Benchmarks Study 2008 Educational Endowments 11

Viewed by numbers of participants, the 2008 Study is most heavily weighted in the small
endowment category (assets of $10 million to $50 million) with 246 institutions compared
with 238 a year ago. After that, the next largest category is $101 million to $500 million,
with 210 participants against 202 a year ago. Two categories are virtually the same sizethe
$51 million to $100 million category with 106 institutions (107 last year) and the under
$10 million cohort with 105 institutions (104 last year). The very large cohort of institutions
with assets between $501 million and $1 billion is also almost unchanged at 44 institutions
versus 45 last year. (Changes from year to year can also reflect fluctuations in portfolio values
and lead to the reclassification of institutions into larger or smaller size categories.)
FIGURE 1.2
Commonfund Benchmarks Institutions by Types
Study Year 01 02 03 04 05 06 07 08
Private College and university endowments 275 309 322 377 374 374 371 370
Independent School endowments 127 123 124 95 150 175 171 209
All publics Public system endowments/foundations 161 185 191 185 183 180 199 188
Public only Public system funds 56 62
SIRF State Institution-Related Foundations 143 126
s
Public institutions subdivided into Public Only and SIRF in 2007
As in past years, the Study once again segments respondents into private and public (college
and university endowments) and independent (school endowments) categories. We also
subdivide the public category into public system funds and state institution-related foundations
(SIRFs). Private college and university endowments once again represent the largest cohort
370 institutions this year, little changed from 371 last year. All public institution endowments
total 188, down slightly from 199 last year; the number of participating public system
funds increased to 62 from 56, but the number of participating SIRFs dropped to 126 from
143. The largest change came in the independent category, where the number of participating
institutions rose to 209 from 171.

The Benchmarks Leaders
The 2008 Commonfund Benchmarks Leaders are set apart from the other institutions
participating in the Study by their superior investment performance.
F igure 1 . 3
Top Decile and Top Quartile Performerss by Size
Total Institutions Top Decile Top Quartile

729 741 767 66 68 72 164 180 181
05 06 07 05 06 07 05 06 07
Over $1 billion 40 45 56 15 22 29 27 39 42
$501 million$1 billion 42 45 44 9 9 11 23 27 26
$101$500 million 197 202 210 23 26 17 64 79 71
$51$100 million 104 107 106 7 6 8 15 15 23
$10$50 million 255 238 246 9 4 6 29 19 18
Under $10 million 91 104 105 3 1 1 6 1 1
s
Based on reported returns for Fiscal Years 2005, 2006 and 2007
F igure 1 . 4
Top Decile and Top Quartile Performerss by Type

767 72 181
Private 370 44 116
Independent 209 14 29
All publics 188 14 36
Public only 62 9 19
SIRF 126 5 17
s
Based on reported returns for Fiscal Year 2007
Of the 767 participating institutions, 72 ranked in the top decile and 181 in the top quartile.
Among the 56 institutions with more than $1 billion in endowment assets, 52 percent (29)
were top decile performers, and 75 percent (42) were in the top quartile.1 At the opposite
extreme, one institution with under $10 million in endowment assets also made the top decile.
The largest single cohort is the 71 institutions in the $101 million to $500 million category
that qualified for the top quartile.
1 It should be noted here that 719 of the 767 participating institutions provided return data for the most recent fiscal year.
Top decile and quartile are defined as the top 10 percent and 25 percent of these institutions, subject to expansion or reduction
to take account of ties.

Examining the composition of the Benchmarks Leaders group over the past several
years, it is evident that the group is increasingly composed of large institutions
a reflection, perhaps, of the multiple advantages conferred by greater financial and
staff resources in achieving superior investment returns:
In FY2004, 9 percent of the top decile were endowments in the over $1 billion cohort.
In FY2005, that number jumped to 23 percent.
In FY2006, it increased to 32 percent.
And, this year, FY2007, it increased again to 40 percent.
Looking at Benchmarks Leaders by type, 61 percent of the top decile and 64 percent of the
top quartile are private colleges and universities. Among the top decile, independent schools
and public institutions (including SIRFs) are evenly represented, at 19 percent and 20
percent, respectively. Among the top quartile, public institutions account for 20 percent and
independent schools the remaining 16 percent.
F igure 1 . 5
Average Returns for Total, Top Decile and Top Quartile Performers

767 72 181
FY2007 net annual total return 16.9 22.6 20.8
3-year return 12.8 16.5 15.2
5-year return 11.5 14.1 13.1
Top decile institutions in the Study returned an average of 22.6 percent in FY2007, while
top quartile institutions returned an average of 20.8 percent. By comparison, those returns for
FY2006 were, respectively, 16.8 percent and 14.8 percent. While the Benchmarks Leaders
maintain a healthy return advantage over the general Study population, participating institu-
tions as a whole also increased their returns, by an average of 630 basis points over the
previous year. By comparison, the top decile improved returns by 580 basis points and the
top quartile by 600 basis points. As we will see in Chapter 2, in a year in which publicly-
traded equities (domestic and international) generated the years best average performance it
was possible for institutions in the bottom three deciles with high allocations to these asset
classes to show strong improvement in their returns, even in the absence of the high alloca-
tions to alternative strategies that are the traditional hallmark of the Benchmarks Leaders.
For three- and five-year periods, the top decile and top quartile maintain a distinct advantage
over the Study universe, as Figure 1.5 shows.
While many factors contribute to investment performance, the fact that many of the most
successful endowments are among the largest points to the considerable advantages that size
offers. Among the most important are the ability of the largest endowments to gain access to
top managers and manage extremely large and diversified allocations to alternative asset classes.

Asset Allocation
As Figure 1.6 shows, the Benchmarks Leaders have the largest allocations to alternative
strategies. Top decile institutions have allocated fully 52 percent of their endowment assets to
alternative strategies; for the top quartile, the allocation is 47 percent. This compares with
42 percent for the Study population overall. Conversely, the Benchmarks Leaders have smaller
allocations to domestic equities and fixed income securities, and are roughly even with the
entire Study population in their international equities allocation. Benchmarks Leaders also
do a better job of keeping cash to a minimum 1 percent versus 3 percent for the overall
Study group.
F igure 1 . 6
Asset Allocationss for Total, Top Decile and Top Quartile Performers
for Fiscal Years 2005, 2006 and 2007

729 741 767 66 68 72 164 180 181
05 06 07 05 06 07 05 06 07
Asset class
Domestic equities 28 26 23 20 18 17 22 21 20
Fixed income 16 13 12 15 11 10 15 11 11
International equities 18 20 20 19 21 20 18 20 21
Alternative strategies 35 39 42 44 49 52 43 46 47
Short-term securities/cash/other 3 2 3 2 1 1 2 2 1
s
Dollar-weighted
Larger institutions have lower allocations to domestic equities and higher allocations
to alternatives, so when asset allocations are viewed on an equal-weighted basis (See Figure
1.6A/EW in Appendix II), the average institution has 18 percentage points more allocated
to domestic equities and 22 percentage points less to alternatives. The top decile and top
quartile are disproportionatelythough not exclusivelycomposed of the larger institu-
tions, so the average top decile institution has an equal-weighted domestic equity allocation
that is 11 percentage points higher than the dollar-weighted calculation shows, and 14 per-
centage points lower than the alternatives allocation. For the top quartile, the equal-weighted
figures show an allocation to domestic equities that is 12 percentage points higher and an
allocation to alternatives that is 15 percentage points lower.
Regardless of how the data are weighted, it is nonetheless true that top decile and top quartile
institutions have substantially lower domestic equities allocations and higher alternatives
allocations than the overall group.

If we compare the allocation to alternative strategies among the Benchmarks Leaders with
that of the total Study universe, we can observe considerable increases from FY2004 to FY2006
particularly among the Leadersbut more moderate increases this year over last.

Alternative Strategy Allocations for Total, Top Decile and Top Quartile Performers for Fiscal Years 20042007
FY2007 42 52 47
FY2006 39 49 46
FY2005 35 44 43
FY2004 34 36 35
Among the top decile performers, allocations to domestic equities, fixed income and
international equities all decreased slightly by a percentage point in this years Study,
with all the funds being redirected to the alternative strategies allocation. Among the top
quartile, shifts were minuscule.
F igure 1 . 7
Domestic Equity Asset Mixs for Total, Top Decile and Top Quartile Performers
for Fiscal Year 2007

Responding institutions 656 56 156
Type of investment strategy
Active 83 86 86
Indexed (passive/enhanced) 17 14 14
s
Dollar-weighted
Within domestic equity portfolios overall, active strategies accounted for 83 percent of
assets. This proportion was higher for top decile and top quartile endowments at 86 percent
each. We note that there has been an increase in active management of this allocation across
the board, but especially among the Benchmarks Leaders. Last year, the top decile reported
managing 78 percent of domestic equity assets actively; for the top quartile, the proportion
was 79 percent. Apparently, despite the reduced allocation to domestic equities, endowments
feel there is value to be added by hiring skilled active managers.

F igure 1 . 8
Fixed Income Asset Mixs for Total, Top Decile and Top Quartile Performers

Active 73 64 67
Passive 20 33 28
International bonds 7 3 5
s
Dollar-weighted
In contrast with domestic equities, institutions are trending toward the passive approach
in their fixed income allocation, evidently due to a desire to avoid active risk in the fixed
income portfolio. The passive allocation is upsharplyacross the board: to 20 percent
from 11 percent for the Study universe; to 33 percent from 12 percent for the top decile;
and to 28 percent from 14 percent for the top quartile. An even more pronounced change
in this case, a reduction is noted in allocations to international fixed income.
F igure 1 . 9
International Equity Asset Mixs for Total, Top Decile and Top Quartile Performers

Responding institutions 544 585 635 51 51 57 126 139 156
05 06 07 05 06 07 05 06 07
Type of investment
Active MSCI EAFE 66 68 69 60 61 64 63 65 67
Passive/index MSCI EAFE 5 5 5 3 3 3 3 4 4
Emerging markets 29 27 26 37 36 33 34 31 29
s
Dollar-weighted
Active management is by far the preferred approach to international equity investing.

The top decile and top quartile increased their active allocations to 64 percent and 67 percent,
respectively. Passively managed international equity remains virtually unchanged. Both
the top decile and top quartile trimmed a few percentage points from their emerging markets
allocations, while the Study universe pared just one percentage point from the overall
emerging markets allocation. While it is possible that the Benchmarks Leaders are taking some
profits after emerging markets spectacular run-up of recent years, it is also possible that
the minor changes in active/passive international equities and emerging markets are reflective
of market valuation shifts rather than conscious decisions.

F igure 1 . 1 0
Alternative Strategies Asset Mixs for Total, Top Decile and Top Quartile Performers

Type of investment
Private equity (LBOs, mezzanine,
M&A funds and international
private equity) 19 20 19
Marketable alternative strategies
(hedge funds, absolute return,
market neutral, long/short, 130/30,
event-driven and derivatives) 48 42 45
Venture capital 7 7 7
Private equity real estate
(non-campus) 14 18 16
Energy and natural resources
(oil, gas, timber, commodities and
managed futures) 10 11 11
Distressed debt 2 2 2
sD
ollar-weighted
Within their alternative strategies allocation, the top decile and top quartile allocate the
largest share to marketable alternative strategies, a category which includes hedge funds.
Respectively, they have 42 percent and 45 percent of their alternatives allocation in marketable
alternatives. While their overall alternative strategies allocation is smaller than that of
the Benchmarks Leaders, the Study universe as a whole allocates 48 percent to marketable
alternatives. The second largest allocation is to private equity, in the 19 to 20 percent range
across the board. In descending order, that is followed by private equity real estate, energy
and natural resources, venture capital and distressed debt.
Viewed on an equal-weighted basis, some allocations change while others remain relatively
the same. Marketable alternatives allocations rise to 54 percent and 57 percent, respectively,
for the top decile and top quartile from 42 percent and 45 percent on a dollar-weighted
basis. Equal-weighted private equity allocations are 16 percent and 15 percent for the top decile
and top quartile, respectively, versus 20 percent and 19 percent. On an equal-weighted basis
the top decile allocates 12 percent to private equity real estate and the top quartile 10 percent.
Those figures compare with 18 percent for the top decile and 16 percent for the top quartile
on a dollar-weighted basis. In other categories venture capital, energy and distressed debt
the differences between equal-weighted and dollar-weighted are much narrower.
(See Figure 1.10A/EW in Appendix II.)

Of the four years that have produced double-digit returns since the inception of
the Educational Endowments Report, FY2007 was the best. But, as this goes to press
(in February 2008), recent market corrections suggest to many observers that the bull
market for equities that began in 2003 may have ended. Thus, we are confident that one
item that will not find its way onto the agendas of investment committees is compla-
cency. Equally so, we believe that endowments of all sizes are advised to continue
the search for those strategies and managers that will diversify their portfolios and
offer the potential for attractive returns whatever direction public markets take.
As to the Benchmarks Leaders, the data presented in this chapter suggest that the
endowments with the strongest investment returns in FY2007 share a number of char
acteristics. They have higher-than-average allocations to alternative strategies, and
within alternatives they are more broadly diversified. They have lower-than-average
allocations to marketable alternatives, and larger holdings of other asset classes
that delivered superior returns over the 12-month period.
To be sure, size is an advantage. A large institution can deploy more assets and has
greater access to the select group of alternatives managers who more consistently
deliver the best returns. Large institutions have other built-in advantages that often con-
tribute to superior performance: larger staff, greater resources and more experienced
investment committees.
That said, it is not size as such that determines performance, but practices and policies
that, for a variety of reasons, manifest themselves most often among large institutions.
In the subsequent chapters of this report we will attempt to identify these practices and
advance thoughts about how endowments of all sizes and types can improve their own
performance.

Chapter 2 Returns and Asset Allocation
Investment Environment
In the United States, fiscal 2007 was a year in which the economy entered a mid-cycle
slowdown. While slowdown may have a negative connotation, a mid-cycle slowdown can
be a period when interest rates, economic growth, corporate earnings and inflation interact
to create a favorable environment for investors. And, indeed, that was the case this time, as
fiscal 2007 provided a hospitable environment for investment returns.
It nevertheless took some time for this story to unfold, as the public equity markets began
the fiscal year in July 2006 with little strength. FY2006 had finished weakly, and the start of
the new fiscal year gave little sign of promise. Investors expecting an early summer rally
were disappointed, but it did appear in August; and September, often a disappointing month,
was also positive.
What triggered the reversal? In August 2006, the Federal Open Market Committee (FOMC)
voted not to raise its key short-term Fed funds rate after 17 successive quarter-point increases,
and chose to keep the rate unchanged at its September meeting as well. The August Consumer
Price Index (CPI) numbers which showed a 0.2 percent monthly increase, the lowest since
April seemed to confirm the Feds belief that inflationary pressures were easing. On the
energy front, a barrel of crude that was selling for more than $77 in early August dipped below
$60 in intraday trading in late September, while natural gas futures hit their lowest point in
two years in the middle of the month. Meanwhile, gold, which had been selling at $699 an ounce
in May, sank to $583 in mid-Septemberanother sign of moderating commodity prices.

By December 2006, the S&P 500 Index had posted a return of 12.37 percent for the first
half of the 07 fiscal year. Periodic bouts of volatility moderated public market returns for the
final six months of the fiscal year through June 2007, but international markets delivered a
strong 19.60 percent return for the fiscal year, as measured by the MSCI World ex-U.S. Index.
Meanwhile, the Lehman Aggregate Bond Index returned 6.12 percent for the fiscal year.
These returns would have been stronger but for a slightly negative final fiscal quarter as
concerns over sub-prime mortgage loans and tighter credit began to take their toll.
Fiscal 2007 marked the fifth year of improving economic conditions and the fifth year of
a bull market, which has produced solid investment gains for educational endowments,
as the chart that follows clearly demonstrates.
FIGURE 2.1
Average Annual Total Returns for Total Institutions

for Fiscal Years 2000 2007
20%
16.9
14.7
13.2
10.6
10 9.7
3.1
-3.0
-6.0
-10 2000 2001 2002 2003 2004 2005 2006 2007

s
Net of fees
Returns
Endowments reported positive returns for the fifth consecutive year in FY2007, with an
average return (net of fees) of 16.9 percent the highest in the eight years that the Study
has been published. Only FY2000s 13.2 percent return and FY2004s 14.7 percent
return came close.

FIGURE 2.2
Average Return by Asset Class for Fiscal Year 2007

Total
Numbers in Percent (%) Institutions
Average FY2007 total return 16.9
Domestic equities 19.5
Fixed income 5.9
International equities 28.3
Alternative strategies 16.8
Private equity (LBOs, mezzanine, M&A funds and international private equity) 19.3
Marketable alternative strategies (hedge funds, absolute return, market neutral,
long/short, 130/30, event-driven and derivatives) 15.8
Venture capital 13.8
Private equity real estate (non-campus) 18.7
Energy and natural resources (oil, gas, timber, commodities and managed futures) 18.8
Distressed debt 16.9
Short-term securities/cash/other 6.5
Average returns by asset class were also strong. International equities led the way with a
28.3 percent advance even higher than FY2006s 24.6 percent average return. Domestic
equity returns were also strong19.5 percent, nearly double FY2006s 10.2 percent. Alter
native strategies as a group had a return of 16.8 percent, up from 14.6 last year. Short-term
securities and cash provided a 6.5 percent return, up from 5.4 percent in FY2006. In an
environment in which the yield curve was inverted for much of the fiscal year, short-term
securities outperformed fixed income securities, which returned 5.9 percent. Fixed income
returns were nevertheless up sharply from an average of 1.2 percent in last years Study.
Among alternative strategies, private equity returns led the way with a return of 19.3 percent.
The broad category of energy/natural resources commodities and managed futures followed,
posting an 18.8 percent return. Breaking that category out into two more specific strategies
shows distinctly different performance levels. Energy and natural resources advanced a strong
18.8 percent. Private equity real estate (18.7 percent), distressed debt (16.9 percent), market-
able alternatives (15.8 percent) and venture capital (13.8 percent) all supported the strong
performance from alternative strategies as a whole.
Examining the returns on a median rather than an average basis, little difference could be
observed. The median overall return for total institutions, for instance, was somewhat higher
at 17.2 percent versus the 16.9 percent average return. Comparing average and median
returns, results from domestic equities, fixed income and international equities varied by less
than 1 percent. A somewhat greater variance appeared in alternative strategies, where the
larger institutions are more heavily allocated. In this allocation, median returns were nearly
one percentage point lower, at 15.9 percent versus 16.8 percent average returns. Within
alternative strategies, the single greatest difference was in private equity real estate (non-campus);
here, the median return was 16.2 percent versus an 18.7 percent average return.

FIGURE 2.3
Growth from Investment Returnss

100%
82.5
80.2
77.8
77.4
75.4
72.0
71.0
80
60
40
20
0 Total Over $501 $101 $51 $10 Under

Institutions $1 Billion Million $500 $100 $50 $10
$1 Billion Million Million Million Million
s590 responding institutions
In a new area of inquiry this year, participants reported that 75.4 percent of their endowments
growth in FY2007 came from investment returns, as opposed to gifts and donations. Responses
ranged from a high of 82.5 percent for institutions in the $501 million to $1 billion range
to a low of 71.0 percent for those in the under $10 million category. By comparison, in the
most recent Commonfund Benchmarks Study Operating Charities Report, respondents
reported a rate of 81.5 percent. Although they are in another sphere of the nonprofit sector,
operating charities have similarities to educational institutions in their relative dependence
on both investment returns and gifts for endowment growth.
Viewed by type of institution, public systems reported an average of 82.9 percent of endow-
ment growth from investment returns, but SIRFs reported that just 68.3 percent of growth
came from this source. Private colleges and universities realized 77.5 percent of endowment
growth from investment returns, compared with 73.8 percent for independent schools.
Gift flows can, of course, vary widely from year to year. Several participants noted the variability
of both gifts and internal fund-raising goals. Said one, This varies each year depending on
the focus and strategy of the development office.

Long-Term Returns
With the last six months of 2002 now removed from the average five-year return calculation,
long-term returns improved markedly this year. The five-year return for all institutions
jumped to 11.5 percent from 6.8 percent in FY2006. The three-year return for all institutions
rose more modestly, to 12.8 percent from last years 12.3 percent.
FIGURE 2.4
Average One-, Three- and Five-Year Returnss

24%
21.0
19.4
17.8
17.1
16.9
16.3
18
15.6
14.0
13.7
13.6
13.5
12.8
12.5
12.5
11.7
11.5
11.3
11.4
10.8
10.7
10.1
12
0 Total Over $501 $101 $51 $10 Under

FY2007 total return

3-year return
5-year return
s
Net of fees
Viewed by endowment size, endowments in the over $1 billion category had the highest
investment returns. Performance was correlated with size from largest to smallest for all periods
one, three and five years.
This gap between the returns secured by the largest endowments and those obtained by
their smaller counterparts has existed since the Study began. Certainly, the larger endowments
early commitment to alternative investments has been an important driver of this difference.
In certain strategies, such as timber, the larger endowments are harvesting returns on commit-
ments made as long ago as a decade or more. Consistent investing over the long term, and
being able to identify promising asset allocation opportunities early on, can also provide access
to top-tier investment managers while they are still open to new investorspractices that
have proven to be important to maximizing return from alternative investment strategies.

Viewed by type of fund, private institutions returns led for all three time periods, while
independent schools returns lagged for all threeperhaps reflecting the fact that independent
school endowments tend to be smaller on average. From best to worst, however, variability
by type of fund was not extreme.
FIGURE 2.5
Long-Term Return Objectives

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Have return objectives 65 62 73 71 60 68 47

Less than 5% 0 0 0 1 1 0 1
5.05.9% 4 2 0 2 3 6 10
6.06.9% 4 5 7 4 4 4 3
7.07.9% 8 5 0 8 10 9 5
8.08.9% 24 27 32 24 24 27 8
9.0% and over 25 23 34 32 18 22 20
Do not have return objectives 35 38 27 29 40 32 53
Average 8.3 8.4 8.7 8.6 8.3 8.2 8.0
In the context of investment policy, participating endowments reported that they have
a minimum average long-term return objective of 8.3 percent, just slightly above last years
8.2 percent. Perhaps more important, however, fully 35 percent of participants stated that
they do not have such return objectives, a proportion which is up considerably from last
years 22 percent. In FY2005, 30 percent reported that they did not have return objectives.
When asked to state their expected long-term return objective, 49 percent of respondents said
that they are targeting a return of 8.0 percent or more, while a combined total of 16 percent
target a return of less than 8.0 percent (compared to 25 percent last year). Only four respondents
have a return objective of less than 5.0 percent.
Viewed by type, the average return objective ranged from a high of 8.9 percent (SIRFs) to a
low of 7.8 percent (independent schools).
Many endowments say that they use the Consumer Price Index (CPI) or the Higher Education
Price Index (HEPI) plus 3 percent to 5 percent as a long-term return target. One private
university in the Midwest has a return target in the mid-teens, while a private university foun-
dation seeks to beat the composite benchmark for all classifications of investments that we
are involved in, proportionately.

Overall Asset Allocations
Participants in the 2008 Study reduced average domestic equity allocations to 23 percent in
FY2007 from 26 percent in FY2006 and trimmed the average fixed income allocation to
12 percent of total assets from 13 percent. The international equity allocation was unchanged
at 20 percent. The funds flowing out of domestic equity and fixed income found their
way into alternative strategies, which rose to a 42 percent allocation from 39 percent. Finally,
short-term securities and cash inched up to 3 percent from 2 percent.
FIGURE 2.6
Asset Allocationss for Total Institutions

100%
80
60
40
20
0 2000 2001 2002 2003 2004 2005 2006 2007

Domestic equities
Fixed income
International equities
Alternative strategies
Short-term securities/cash/other
sDollar-weighted
Looking at overall asset allocation on an equal-weighted basis presents a somewhat different

picture than the dollar-weighted allocations described in the preceding paragraph. Viewed
overall, the large institutions influence on the dollar-weighted calculation is evident. On an
equal-weighted basis, domestic equities accounted for 41 percent of total institutions allocation
versus 23 percent on a dollar-weighted basis; fixed income, 18 percent equal-weighted versus
12 percent dollar-weighted; international equities, 16 percent versus 20 percent dollar-weighted;
alternative strategies, 20 percent versus 42 percent dollar-weighted; and short-term securities/
cash, 5 percent versus 3 percent dollar-weighted. (See Figure 2.7A/EW in Appendix II.) Viewed
within size groups, however, there is relatively little difference. Those institutions with over
$1 billion in assets account for most of the difference in the allocations showing the greatest

disparity between the weightings specifically, domestic equities and alternative strategies. In
this size cohort, marketable alternatives are 40 percent equal-weighted and 47 percent dollar-
weighted, while domestic equities are 24 percent equal-weighted and 19 percent dollar-weighted.
Most other allocations showed little change between the two weighting methodologies.
A comparative analysis of Figures 2.4 and 2.7 shows the link between the variability of
returns by size of fund from a high of 21.0 percent to a low of 13.6 percent and the asset
allocation decisions being made by educational endowments.
FIGURE 2.7
Asset Allocationss for Fiscal Years 2005, 2006 and 2007

$501 $101 $51 $10 Under

729 741 767 40 45 56 42 45 44 197 202 210 104 107 106 255 238 246 91 104 105
05 06 07 05 06 07 05 06 07 05 06 07 05 06 07 05 06 07 05 06 07
Asset class
Domestic equities 28 26 23 22 20 19 37 32 29 39 36 34 47 45 45 48 46 45 48 48 49
Fixed income 16 13 12 15 12 11 16 13 12 18 17 14 19 18 17 23 22 20 28 26 26
International equities 18 20 20 18 21 21 17 20 20 17 18 20 14 15 17 11 13 14 9 9 10
Alternative strategies 35 39 42 42 46 47 27 31 35 23 25 28 17 18 18 13 14 15 9 8 7
Short-term securities/cash/other 3 2 3 3 1 2 3 4 4 3 4 4 3 4 3 5 5 6 6 9 8
s
Dollar-weighted
As in other recent Studies, the larger the fund, the smaller the allocation to domestic equities
and fixed income, and the larger the allocation to alternative strategies. The same pattern
very nearly holds for international equitiesthat is, the larger the endowment the larger the
allocation to this asset class. The largest endowments also have the smallest allocation to
short-term securities and cash 2 percent while the two smallest size cohorts have the
largest, at 6 percent and 8 percent.
Asset allocation changes from last years Study are very small. In the matrix of fund size and
asset allocation, only in four cells were there shifts as great as three percentage points: In the
$501 million to $1 billion cohort, domestic equities fell to 29 percent from 32 percent and
alternatives rose to 35 percent from 31 percent; among the $101 million to $500 million group,
fixed income allocations were lowered to 14 percent from 17 percent and alternative strategies
allocations were increased to 28 percent from 25 percent.

While institutions have been shifting investment dollars from some asset classes into others
for several years, the relatively unchanged allocations this year compared to last may indicate
that participants in the Study are rebalancing their portfolios on a regular basis. As an example,
fixed income allocations might have shrunk to an even smaller proportion of the total
portfolio in the absence of active rebalancing, given the fact that returns from that asset class
were much lower than returns from equity asset classes.
Investments in Domestic Equities

Within domestic equity portfolios, active strategies accounted for 83 percent of domestic equity
assets. The greatest use of active strategies occurred in the under $10 million category, where
93 percent used that approach (a slight reduction from last years 95 percent). Endowments in
the $101 million to $500 million range were least likely to use an active approach, at 78
percent. The largest endowments increased their exposure to active strategies to 84 percent
in FY2007, up from 81 percent in FY2006.
FIGURE 2.8
Domestic Equity Asset Mixs for Fiscal Year 2007

$501 $101 $51 $10 Under


Active 83 84 88 78 81 86 93
Indexed (passive/enhanced) 17 16 12 22 19 14 7
s
Dollar-weighted
Investments in Fixed Income

Active strategies accounted for an average 73 percent of fixed income assets. Passive strategies
accounted for 20 percent and international bond allocations accounted for the final 7 percent.
Similar allocations for last year were 79 percent, 11 percent and 10 percent, respectively; as a
group, participating institutions greatly increased their use of passive approaches and signifi-
cantly lowered their international bond allocation. Endowments overall seem to be favoring
a lower-cost, passive approach to fixed income investing while concentrating their energy and
expertise on international equities and alternative equity strategies, which require more time
but also offer the potential for greater rewards.

FIGURE 2.9
Fixed Income Asset Mixs for Fiscal Year 2007

$501 $101 $51 $10 Under


Active 73 69 75 79 79 80 76
Indexed (passive/enhanced) 20 25 17 14 13 13 15
International bonds 7 6 8 7 8 7 9
s

Dollar-weighted
Investments in International Equities

Allocations within international equities remained relatively stable, as use of active approaches
accounted for 69 percent of the allocation (up slightly from 68 percent), passive allocations
remained flat at 5 percent and emerging markets allocations declined one percentage point
to 26 percent. The greatest change among the various size categories took place among endow-
ments in the $51 million to $100 million range, where the average active allocation jumped
to 81 percent from 69 percent in FY2006 and the average passive allocation fell to 7 percent
from 15 percent. Institutions in the same size cohort also reduced their emerging markets
allocation to 12 percent from 16 percent. While endowments with assets under $10 million
increased their emerging markets allocation slightly to 20 percent from 19 percent, it remained
well below the 29 percent of two years ago. The largest endowments cut their allocation to
28 percent from 32 percent. This reduction may reflect some profit-taking after a long period
of highly positive returns for this asset class. Nevertheless, those institutions maintaining mean-
ingful allocations to emerging markets enjoyed another year of very strong returns.
FIGURE 2.10
International Equity Asset Mixs for Fiscal Years 2006 and 2007
$501 $101 $51 $10 Under

Responding institutions 585 635 32 48 37 38 167 176 82 91 189 205 78 77
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Type of investment
Active MSCI EAFE 68 69 65 67 70 69 74 75 69 81 76 73 77 72
Passive/index MSCI EAFE 5 5 3 5 5 4 8 6 15 7 12 14 4 8

Emerging markets 27 26 32 28 25 27 18 19 16 12 12 13 19 20
s
Dollar-weighted

While an allocation to international equities and emerging markets provides a clear diver-
sification benefit, investment returns from such an allocation are influenced favorably or
unfavorably by exchange rates. As the following table demonstrates, during FY2007 U.S.
investors realized a significant currency benefit when local market returns were translated into
U.S. dollars (with the exception of Japan, where the weak yen provided no beneficial boost
to returns).

Trailing 12-Month Returns as of June 30, 2007s
Local Currency U.S. Dollar
MSCI Europe 24.91 32.44

MSCI Japan 15.84 7.23
MSCI Emerging Markets 39.02 44.99
MSCI World ex-U.S. 23.02 27.09
Source: Bloomberg s
Net return
Investments in Alternative Strategies

Among alternative strategies, marketable alternatives (a category that includes hedge funds,
absolute return strategies, market neutral strategies, long-short equity, 130/30, event-driven
strategies and derivatives) account for 48 percent of the allocation, well ahead of private
equity (including LBOs, mezzanine debt, M&A funds and international private equity) at
19 percent. Private equity real estate accounts for a 14 percent share; energy and natural
resources, 10 percent; venture capital, 7 percent; and distressed debt (which may be part
of an overall credit strategy), 2 percent.
FIGURE 2.11
Alternative Strategies Asset Mixs for Fiscal Year 2007

$501 $101 $51 $10 Under

Type of investment
private equity) 19 20 16 12 8 6 3

event-driven and derivatives) 48 46 54 60 64 70 73
Venture capital 7 7 7 4 3 2 0
(non-campus) 14 15 9 10 13 11 9
(oil, gas, timber, commodities
and managed futures) 10 10 10 12 10 6 2
Distressed debt 2 2 4 2 2 5 13
s
Dollar-weighted

The greatest allocation to marketable alternatives is not that of the endowments with assets
over $1 billionwhich, at 46 percent, is actually two percentage points below the average for
all institutions but that of the endowments in the $10 million to $50 million cohort
(70 percent) and the endowments with under $10 million (73 percent). This reflects the fact
that marketable alternative strategies can be somewhat less capacity-constrained and more
liquid than other alternative strategies, making them more attractive to smaller institutions
seeking to fund an allocation to alternative investments. Endowments in the over $1 billion
category have the largest allocation to private equity20 percent, which is measurably ahead
of the other size cohorts. This allocation reflects these institutions longer experience with
this asset class, where allocations can take many years to build.
The distressed debt allocation is fairly consistently in the lower single digits; with the under
$10 million cohort, however, it is 13 percent, which may reflect the allocation to that asset
class by the Commonfund Multi-Strategy Funds, many of whose investors are smaller endow
ments. Conversely, the energy/natural resources allocation is in the 1012 percent range
except for the two smaller size cohorts, where it falls to 6 percent and 2 percent, most likely
reflecting the capacity constrained nature of this asset class. The largest endowments have
the largest allocation to private equity real estate, and the two largest cohorts have the greatest
exposure to venture capital (an allocation that is nonexistent among the smallest endow-
ments, where legal constraints prohibit their investing directly and the perceived need for
liquidity may be high).
When the alternative strategies allocation data are analyzed on an equal-weighted basis, the
only difference of substance is in the marketable alternatives allocation of the over $1 billion
group, which is 3 percentage points higher than the dollar-weighted allocation. (See Figure
2.11A/EW in Appendix II.)
Viewed by type, public institutions have the largest allocations to marketable alternative
strategies and (to a lesser degree) private equity. Independent schools have by far the largest
allocation to private equity real estate, at 37 percent (the next closest group is private colleges
and universities, at 14 percent). Energy/natural resources and distressed debt show the least
variability when viewed by type.
Portfolio Rebalancing
The proportion of participants rebalancing their portfolios rose slightly to 73 percent in
FY2007 from 72 percent in FY2006. This figure remains remarkably steady, as the figure
for FY2005 was 74 percent and, in fact, the proportion rebalancing from year to year
has consistently been in the two-thirds to three-quarters range since the Studys inception.

FIGURE 2.12
Portfolio Rebalancing for Fiscal Years 2006 and 2007

100%
89
86
86
83
82
79
79
79
73
80
72
69
68
60
47
46
40
20
0 Total Over $501 $101 $51 $10 Under

FY2006/ 741 institutions

Viewed by size, 86 percent of institutions in the two largest categories reported having
rebalanced, while at the opposite extreme only 46 percent of those in the under $10 million
grouping dida finding that supports the view that the smaller institutions may be reluctant
to sell assets from classes where performance has been good in order to put the cash into assets
that have performed poorly. To a lesser degree, the same issue applies to the endowments
with $10 million to $50 million, 69 percent of which rebalanced during the fiscal year.
Viewed by type, private institutions and all publics rebalanced at almost the same rate,
76 percent and 75 percent, respectively, while just 65 percent of the independents reported
rebalancing.
Turning to rebalancing frequency, of those institutions that did rebalance in the past year,
58 percent said they did so as needed. Some 16 percent reported that they rebalance quarterly,
12 percent annually, 7 percent monthly and 6 percent semi-annually.

FIGURE 2.13
Portfolio Rebalancing Frequency for Fiscal Year 2007

$501 $101 $51 $10 Under

Annually 12 2 0 20 9 11 21
Semi-annually 6 0 3 3 7 9 8
Quarterly 16 15 18 13 20 16 15
Monthly 7 4 5 5 16 6 2
As needed 58 75 74 58 48 57 52
Other 1 4 0 1 0 1 2
Within these larger groupings, some distinctive individual practices emerge. One independent
school says it rebalances every six years; a private university in the East rebalances daily; and
a few respondents say that they have never rebalanced or dont rebalance because their endow-
ment is too small. Another private university in the East reported that it rebalances as
committed capital is called throughout the year and as asset classes deviate from target alloca-
tions due to investment returns. One school said, Weve hired a manager that provides
a rebalancing service using an overlay strategy (using futures) to rebalance on a daily basis.
Others rebalance based on gift inflows or major withdrawals, and still others on the advice
of consultants. Several schools review asset allocation every quarter but only make rebalancing
decisions as needed.
Expected Changes to Asset Allocations

As educational endowments look at expected changes in allocations to the various asset
classes, they report that they expect the trends of the past several years to remain in place in
the near future. That indicates that decreases are expected to outweigh increases in domestic
equities, fixed income and short-term securities /cash while increases outweigh decreases in
international equities and alternative strategies.
The greatest disparity between increases and decreases is in alternative strategies, where funds
expecting to increase allocations far exceed those planning on decreasing them (27 percent
planning an increase versus 1 percent planning a decrease). In international equities, the larger
endowments generally plan to reduce allocationsperhaps reflecting an intention to allocate
assets away from this area in light of international/emerging markets extended period of out-
performance or, perhaps, to rebalance their non-U.S. dollar exposure because of the dollars
fallwhile the smaller institutions are contemplating putting more into the asset class. Continu-
ing recent trends, planned decreases still outweigh planned increases in domestic equities and
fixed income.

FIGURE 2.14
Expected Changess to Asset Allocations

Short-Term
Domestic International Alternative Securities/
Size of Fund Equities Fixed Income Equities Strategies Cash/Other
Increase Decrease Increase Decrease Increase Decrease Increase Decrease Increase Decrease
Total institutions 4 21 6 12 10 7 27 1 1 13
Over $1 billion 5 30 2 16 5 23 32 0 0 16
$501 million$1 billion 2 41 14 16 14 16 48 0 0 16
$101$500 million 3 30 8 16 14 10 41 1 1 18
$51$100 million 2 24 5 8 17 5 32 2 2 12
$10$50 million 5 14 5 11 7 3 18 1 1 12
Under $10 million 5 5 5 5 4 0 5 2 0 5
s
Multiple responses allowed
The great disparity between increases and decreases in alternative strategies that was evidenced
when the data were reviewed by size remains in place when they are looked at by type. Public
institutions and SIRFs are even more likely to be contemplating an increase in alternatives
than are private institutions and independent schools. The gap between those contemplating
increases and those contemplating decreases is narrowest in international equities.
When examined closely, the Study data on asset allocation and expected changes reveal that
the dichotomy between the allocations of large and small endowments is more complex than
it might at first seem. Among the smallest institutions, allocation decisions must take into
account the question of how they will obtain the desired exposures. Because small endowments
often cannot obtain access to the top alternatives managers, they are forced to rely on market-
able alternatives managers and funds of funds. In contrast, the largest institutions have more
freedom to craft allocations based on portfolio risk preferences and return expectations,
with less concern given to issues of execution.
Asset allocation changes can reflect a wide range of motivating factors, from risk-driven
considerations and commitments made in the past to disciplined rebalancing and true policy
portfolio shifts.
Marketable Alternative Strategies

These factors may be significant contributors to observed differences in the use of various
marketable alternative strategies, including hedge funds. Fifty-eight percent of Study par-
ticipants reported using marketable alternative strategies in FY2007, virtually unchanged
from 57 percent the year before. Ninety-six percent of respondents in the $1 billion-plus
category reported using them, down somewhat from 100 percent last year. Meanwhile,
among endowments with less than $10 million in assets, only 3 percent reported using
marketable alternative strategies, down from 7 percent in the FY2006 Study. These small
institutions frequently obtain their marketable alternatives allocation as part of a multi-
strategy fund investment.

FIGURE 2.15
Use of Marketable Alternative Strategies for Fiscal Year 2007

96
100%
93
83
80
73
60 58
40
40
20
3
0 Total Over $501 $101 $51 $10 Under
Viewed by type, 67 percent of private colleges and universities reported using marketable
alternative strategies, while just 46 percent of independent schools reported their use.
All publics public systems and their foundations used them at a rate of 55 percent.
Returning to analysis of marketable alternatives use by size, we note that endowments in

the $51 million to $100 million category increased their frequency of use to 73 percent from
67 percent, while those in the $10 million to $50 million category went to 40 percent from
36 percent.
Most endowments report a stable, low volatility/low return objective for their marketable
alternatives allocation. This is the return target for 60 percent of those surveyed, down from
64 percent last year, versus the 22 percent that pursue a high volatility/higher return target.
FIGURE 2.16
Marketable Alternative Strategy Allocation for Fiscal Year 2007

$501 $101 $51 $10 Under

Stable, low-volatility/lower
return target 60 53 50 57 71 63 s
High volatility/higher
return target 22 31 35 21 13 19 s
Diversified strategy or
fund of funds 12 5 12 16 12 9 s
Other strategies 6 11 3 6 4 9 s
s
Sample size too small to analyze

Those endowments most likely to pursue a high volatility/higher return objective are in the
$501 million to $1 billion category. Their larger counterparts in the over $1 billion category,
by contrast, report a greater proportion pursuing a stable, low volatility/lower return target,
and significantly fewer have a high volatility/higher return target.
FIGURE 2.17
Performance Expectations for Marketable Alternatives Portfolio

$501 $101 $51 $10 Under

Expectations have been

exceeded 28 29 34 27 26 29 s
Performed about as expected 56 54 51 60 54 53 s
Underperformed 6 2 7 6 8 6 s
No answer/uncertain 10 15 8 7 12 12 s
s
Fifty-six percent of participants that use marketable alternatives say that this portfolio alloca-
tion has performed about as expected, and 28 percent report that performance has exceeded
expectations. While the proportion of those reporting that this allocation performed about as
expected has fallen slightly compared with last year, when it was 59 percent, the incidence of
those saying expectations have been exceeded has risen from 24 percent. Those whose expec-
tations have not been met now account for only 6 percent versus 11 percent a year ago.
Viewed by size, 50 to 60 percent of endowments report that their marketable alternative

strategy allocations performed about as expected, with roughly 30 percent saying their expec-
tations have been exceeded.
Most participating endowments are satisfied with their own due diligence and monitoring
of the managers retained to implement various marketable alternative strategies, as Figure
2.18 shows. Nineteen percent of respondents are very satisfied, 36 percent are somewhat
satisfied and 25 percent are satisfied. Only a total of 6 percent are somewhat unsatisfied
or very unsatisfied.

FIGURE 2.18
Satisfaction with Due Diligence/Monitoring of

$501 $101 $51 $10 Under

Very satisfied 19 24 22 15 20 26 s
Somewhat satisfied 36 32 51 40 36 23 s
Satisfied 25 20 15 30 22 27 s
Somewhat unsatisfied 5 0 2 4 9 6 s
Very unsatisfied 1 0 2 1 1 0 s
No answer/uncertain 14 24 8 10 12 18 s
Averagess 3.8 4.1 4.0 3.7 3.7 3.8 3.5
s
ss Average score on a scale of 15 with 5 being high and 1 being low
The very satisfied response peaks at 26 percent among endowments in the $10 million
to $50 million range and troughs at 15 percent in the $101 million to $500 million category.
Endowments in the $51 million to $100 million are most likely to be unsatisfied to some
degree, with 10 percent expressing that sentiment.
Asked to rank their satisfaction on a scale of 1 to 5, with 5 being very satisfied, participating
endowments overall gave a score of 3.8. Viewed by size, the rating was in a fairly tight range,
from a high of 4.1 among over $1 billion endowments to a low of 3.5 among under $10 million
endowments.
One private college in the East asks, [Can you] show me someone who has a good due
diligence process with a fund-of-funds approach? Says another school, Were better than we
were last year, while another offers, We always worry about this.
Returns for fiscal 2007 and for the trailing three- and five-year periods are all the highest
in the Studys eight years cause, certainly, for satisfaction. At the same time, markets,
economies and geopolitical forces continue to shift, meaning that complacency has no
place on the agenda of investment committees.
More to the point, while asset allocations continue to tilt toward alternatives, the pace of
the increase is slowing. Given the fairly static nature of allocations this year and the
fact that returns reached their highest to date for any Educational Endowment Study, we
wonder how much of the this years performance may be attributable to market return,
or beta, as opposed to return derived from manager skill, or alpha.

Viewpoint
Asset Allocation, Risk and Liquidity in Perpetual Portfolios

What effect does asset allocation have on For example, the largest institutions, with
portfolio risk and return over time? Modern assets over $1 billion, had a 10-year return
Portfolio Theory teaches that prudent diver of 9.90 percent, higher than that of any
sification across asset classes can reduce a other size group. At the same time, the stan-
portfolios volatility while increasing return. dard deviation of these returns over 10 years
How can the asset allocation information in was 7.35 percent the lowest of any size
this years Benchmarks Study illuminate the group, indicating that the volatility of these
consequences of the portfolio choices reflected returns was low in relative terms. Perhaps
in the various groups of Study participants? most important, the maximum drawdown
over the 10-year period was -21.01 percent,
We examined the FY2007 asset allocations which was also the lowest of any size group
of the six size groups of Study participants and indicating that the potential for loss was
for all 767 institutions as a whole, and calcu- also the lowest.
lated a long-term total return figure for each
portfolio over the 10-year period from Octo- As we note elsewhere in this Report, both
ber 1997 through September 2007, using index large and small institutions have diversified
returns and volatility metrics for the various portfolios. The large institutions portfolios,
asset classes represented (see table on page 39). however, tend to have a higher percentage
of less-liquid assets than do those of smaller
As the return distribution shows, larger institutions. But we cant tell from Bench-
endowments tended to have higher average marks Report return data alone whether the
returns over the 10-year period analyzed. higher returns and lower risk shown in the
Their returns were also more narrowly dis- table are really due to this choice or whether
tributed, and the maximum drawdown over they are due primarily to the greater access
the 10-year period was lower for the larger that large funds have to the top alternative
endowments than for smaller ones, indicat- asset managers. Through the use of long-
ing that they had less potential negative term index returns, we are able to strip out
tail risk or possibility of loss. the effect of access and manager selection.

Performance Statistics for Endowment Benchmarks Participants for the Period 10/979/07
RoR SD Sharpe 95% VaR CVaR S&P b Max. Drawdown
Total Institutions 9.52% 7.56% 0.76 -2.79% -4.30% 0.48 -21.75%
Over $1B 9.90% 7.35% 0.83 -2.60% -4.11% 0.45 -21.01%
$501M $1B 9.01% 8.17% 0.64 -3.18% -4.76% 0.53 -23.79%
$101M $500M 8.62% 8.54% 0.56 -3.41% -5.01% 0.56 -24.23%
$51M $100M 7.95% 9.31% 0.45 -3.94% -5.53% 0.62 -26.90%
$10M $50M 7.55% 8.82% 0.43 -3.77% -5.20% 0.59 -24.97%
Under $10M 6.98% 8.57% 0.37 -3.67% -5.01% 0.57 -23.85%
Source: Bloomberg, Venture Economics, HFRI, NCREIF, Commonfund Capital, Inc. (Natural Resources)
We can further mitigate the size bias by one-quarter of the members of the Top
examining three other groups. Two are the Quartile group and 20 percent of the mem-
Top Decile and Top Quartile Benchmarks bers of the Top Decile group, for example,
Leaders. The third group is one that we cre- have assets at or below $100 million. As for
ated by dividing Study participants into the Low Liquidity group, 18 percent have
four equal-sized groups, based on the percent- assets at or below $100 million.
age of their portfolios with daily liquidity 1
(see table on page 40). The 191 members of If we subject these less-liquid groups to the
the group with the lowest degree of portfolio same analysis using 10-year index returns
liquidity had less than 66.24 percent of over the period from October 1997 through
their assets in investments with daily liquid- September 2007, we can see that all three
ity, meaning that roughly one-third of these groups had returns higher than the largest
institutions portfolios were composed of endowments, or those with assets over
less-liquid assets. $1 billion. The Top Decile and Low Liquidity
groups had standard deviations of 7.07
While large endowments do make up the percent and 7.28 percent, respectively
bulk of all three of these groups, on the lower than that of the over $1 billion group
whole they are surprisingly diverse. Nearly and the same two had lower maximum
1 We assigned degrees of liquidity as follows: Daily Domestic equity, international equity, domestic fixed income,
international fixed income, cash/short term. Monthly Emerging markets equity. Quarterly/Annual Marketable alternatives.
Illiquid / Multi-Year Private equity, venture capital, private equity real estate, energy and natural resources, distressed debt.

Performance Statistics for Top Decile, Top Quartile, Low Liquidity Participants and Endowments Over $1 Billion for the Period 10/979/07
RoR SD Sharpe 95% VaR CVaR S&P b Max. Drawdown
Over $1B 9.90% 7.35% 0.83 -2.60% -4.11% 0.45 -21.01%
Top Decile 10.31% 7.07% 0.92 -2.43% -3.89% 0.43 -19.86%
Top Quartile 9.98% 7.44% 0.83 -2.65% -4.18% 0.46 -21.17%
Low Liquidity 10.03% 7.28% 0.86 -2.58% -4.07% 0.45 -20.52%
Source: Bloomberg, Venture Economics, HFRI, NCREIF, Commonfund Capital, Inc. (Natural Resources)
drawdowns over the 10-year period, at -19.86 investments; a sound risk management
percent and -20.52 percent, respectively. It structure must, therefore, be in place to ensure
therefore appears that, even after removing that the investment committee understands
the effects of manager access, portfolios that the risks embedded in the portfolio and has
are well diversified and have a higher-than- analyzed how the portfolio as a whole would
average allocation to less-liquid asset classes respond to stress events.
tend to have higher performance over time,
with less volatility and downside risk, than Perhaps most important, investment in
those that do not. illiquid asset classes cannot be undertaken in
a haphazard or tactical manner. Rather, it
Investment in illiquid assets creates both must form part of a multi-year strategy that
opportunities and challenges for managers of views the organizations liquidity, spending
nonprofit institutions. Since a forced or and investment policies in light of its mission.
untimely liquidation may result in returns If the trade-off in an illiquid investment
that are well below those expected for the strategy is indeed one of liquidity for total
asset in question, it is essential that the insti- return, the institution needs to plan for the
tution understand its real liquidity needs well funding of its operations while understand-
and allocate assets accordingly so that suffi- ing that the anticipated total return will be
cient liquidity is retained to fund ongoing the outcome of a diversified group of strate-
operations and anticipate reasonable contin- gies providing varied returns over a series of
gencies. Illiquid investment strategies may years, rather than a quick bet on a single
also be less transparent than conventional manager or asset class.

Spending Chapter 3
Educational endowments now have five straight years of positive returns, four of them at
or close to double digits. This run of strong performance, combined with gifts and donations,
has raised endowment values and enabled institutions to increase dollar spending from the
endowment. At the same time, as investment returns have risen in the past five years, increases
in endowment market values have outstripped this dollar growth in spending, and spending
rates calculated as a percentage of market value have declined slightly from year to year.
The average spending rate reported by participants in the FY2002 Study was 5.1 percent; for
this FY2007 Study, the reported rate is 4.4 percent down just 0.1 percent from FY2006.
FIGURE 3.1
Average Annual Spending Rates for Total Institutions

6.0%
5.5
5.1
5.0
5.0
4.9
4.8
4.8
4.6
4.5
4.5
4.4
4.0 2000 2001 2002 2003 2004 2005 2006 2007


Despite the modest decrease in the overall spending rate this year compared with last, higher
market values allowed some three-quarters of respondents to increase their spending in dollar
terms. Furthermore, since most institutions calculate spending based on a three- or five-year
moving average of endowment values, we may also expect additional increases in dollars available
for spending in FY2008 as current market values replace the lower values of three to five years
ago in spending formulas (the trailing three-year average return last year was 12.3 percent; this
year it is 12.8 percent).
These increased amounts will be needed: More than 90 percent of Study participants increased
their FY2007 operating budgets, which averaged $188.5 million across all participants.
Spending Trends
The average spending rate for all participating institutions in FY2007 was 4.4 percent, down
from 4.5 percent in FY2006. This modest decline in the average spending rate was primarily
the result of increases in the prior years market values, which rose faster than spending in
dollars. When viewed by size of institution, spending rates fell across all six cohorts. The great-
est decline came among the endowments with over $1 billion in assets, which reduced their
rate to 4.4 percent from 4.7 percent last year. The next largest size cohort, endowments in
the $501 million to $1 billion range, trimmed spending to a similar 4.4 percent from 4.6
percent a year ago. As Figure 3.2 shows, spending rates were very consistent across the sector
at 4.4 4.6 percent, with the exception of the smallest endowments with assets under
$10 million, where the rate was 3.4 percent, down from 3.6 percent last year.
FIGURE 3.2
Average Annual Spending Rates for Fiscal Years 2005, 2006 and 2007
8%
6
4.8
4.8
4.7
4.7
4.6
4.6
4.6
4.6
4.6
4.6
4.6
4.5
4.5
4.5
4.4
4.4
4.4
4.3
4.0
3.6
3.4
4
0 Total Over $501 $101 $51 $10 Under



Viewed by type of institution, spending rates were again quite similar, with endowments
of most types reporting a spending rate of 4.4 percent. The only exceptions: 4.5 percent for
private colleges and universities and 4.1 percent for independent schools.
Consistent with this decline in spending rate year over year, 30 percent of Study respondents
reported having decreased spending rates in FY2007 while 18 percent said that they increased
their spending rate and 49 percent said they made no change in their rate.
FIGURE 3.3
Changes to Spending Rates for Fiscal Years 2006 and 2007

$501 $101 $51 $10 Under

741 767 45 56 45 44 202 210 107 106 238 246 104 105
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Increased spending rate 18 18 16 18 20 7 24 20 21 20 15 20 11 17
Decreased spending rate 31 30 56 63 53 50 42 39 32 30 23 19 10 9

No change 48 49 20 12 27 39 34 40 46 47 59 59 77 69
No answer/uncertain 3 3 8 7 0 4 0 1 1 3 3 2 2 5
Viewed by size, the proportion of institutions increasing their spending rate was reasonably
consistent at 1720 percent, with the exception of institutions with assets between $501 million
and $1 billion, where just 7 percent increased the spending rate. In contrast, the most notable
decreases occurred at opposite ends of the size spectrum, where a full 63 percent of the largest
endowments decreased their spending rate but only 9 percent of the smallest did.
Viewed by type of institution, more public institutions increased spending rates than did
private or independent schools. Twenty-two percent of public systems and 26 percent of SIRFs
increased their spending rate versus 17 percent of private colleges and universities and
15 percent of independent schools. Just 18 percent of SIRFs made spending rate reduc-
tions while 31 percent of public systems did. Thirty-nine percent of private institutions
decreased their spending rate, as did 19 percent of independent schools.
Despite the lower overall spending rate, Figure 3.4 shows that nearly three-quarters of Study
participants actually increased their spending in dollars. Among those that increased spending
in dollars, the average increase was significant18.5 percent. Just 8 percent of participating
endowments reduced dollar spending, and among those that did the reduction was 13.7 percent.
Such reductions are not infrequently associated with the completion of buildings or renovation
projects. Strong markets have no doubt influenced these spending trends, and it is possible that
less-robust financial returns in the future may dictate a more conservative attitude.

FIGURE 3.4
Changes to Spending Dollars for Fiscal Years 2006 and 2007

$501 $101 $51 $10 Under

741 767 45 56 45 44 202 210 107 106 238 246 104 105
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Increased spending dollars 67 73 78 86 78 87 73 83 70 74 60 71 60 49
Average percent increase 12.9 18.5 7.7 11.6 7.0 9.1 13.1 11.3 10.4 10.7 13.7 28.3 20.8 36.5
Decreased spending dollars 12 8 11 2 9 2 12 7 13 7 13 11 10 7
Average percent decrease 12.9 13.7 3.4 0.3 21.0 45.0 5.5 7.0 6.3 14.3 17.3 16.1 27.0 18.7
No change 17 15 2 3 11 2 12 7 15 17 23 16 27 36
No answer/uncertain 4 4 9 9 2 9 3 3 2 2 4 2 3 8
When the data are viewed by size, we note that despite the reduction in spending rate from
4.7 percent to 4.4 percent on the part of endowments with assets over $1 billion, 86 percent
of these institutions reported increased spending in dollar terms, an average increase of
11.6 percent. Moreover, just 2 percent of this cohort reduced spending. In general, increases
in dollar spending equate with sizea higher proportion of the larger endowments increased
spending compared with the smaller endowments. However, the smaller endowments that
increased their spending made larger increases. For example, only 49 percent of endowments
in the under $10 million cohort increased spending in dollars, but among those that did
the increase was a strong 36.5 percent. On the other hand, among smaller endowments that
decreased spending, the reductions were fairly large: Citing the under $10 million cohort
once again, only 7 percent reduced spending in dollars, but among those that did the reduction
was 18.7 percent.
Viewed by type, increased dollar spending occurred most frequently among SIRFs and private
institutions, although the difference compared with other types of institutions is not great.
However, among those private institutions spending more dollars, the average increase was reported
at 22.9 percent, well ahead of independent institutions, whose average increase was just 14.7
percent, and all publics at 13.1 percent.
While there have been significant changes in market values in recent years and subsequent
effects on dollar spending, there has been little change in the methods used to determine endow-
ment income for spending. For the past several years, about three-quarters of participating
institutions have said that they use a percentage of a moving average of past market values to
determine normal spending. Indeed, in the FY2007 Study precisely 75 percent use that
approach, unchanged from last year. Among those using this policy, 37 percent use a three-
year moving average and 24 percent use a 12-quarter moving average.

FIGURE 3.5
Spending Policys for Fiscal Year 2007

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Spend all current income 2 0 2 1 2 2 9

Percentage of a moving average 75 71 80 77 82 80 52
Average percentage 4.8 5.0 4.8 4.8 4.8 4.8 4.6
Decide on an appropriate
rate each year 9 4 0 9 4 10 17
Grow distribution at a
predetermined inflation rate 1 2 0 1 0 0 0
Spend a pre-specified
percentage of beginning
market value 5 0 2 5 1 5 14
Average pre-specified
percentage spent 4.5 0.0 4.5 4.2 5.0 4.6 4.6
Last years spending plus
inflation with upper and
lower bands 3 7 5 5 4 0 3
Weighted average or hybrid
method (Yale/Stanford Rule) 5 14 9 5 8 3 1
Meet IRS minimum of 5 percent 0 0 0 0 0 1 0
Other 8 7 9 5 8 7 14
s
For those not using past market values, 9 percent decide on an appropriate rate each year,
unchanged from the 2007 Study. Among the 5 percent that spend a pre-specified percentage
of beginning market values, the average pre-specified rate is 4.5 percent. Five percent of Study
participants use the weighted average or hybrid method (Yale/Stanford Rule). The strongest
support for this method may be found among the over $1 billion endowments, where 14
percent report following this policy, up from 7 percent in last years Study. Still, among these
largest endowments 71 percent use the moving average method. Indeed, this is the most
widely used method across all size cohorts. It predominates even among endowments with
assets under $10 million, where the proportion using it falls to 52 percent. Compared to
endowments of other sizes, these smallest endowments are more likely to decide on an appro-
priate rate each year or to spend a pre-specified percentage of a beginning market value.
Comments from participating educational institutions make it clear that there are a great many
variations on the theme. A community college reports that it spends 50 percent of the dollar
increase in the fund. An independent schools investment committee picks a rate between
2 percent and 7 percent. A large public university in the Midwest says an average spending
rate is 4.25 percent, but it uses two rates, 5 percent and 4.5 percent, based on the year the
endowment in question was established, subject to a dollar limit of +3 percent and -1 percent
over the amount distributed the previous year. A few institutions do not spend at all, some
because they want to grow the endowment.

This year, we asked for the first time whether educational endowments include future gifts
when establishing their spending policy. The answer, as Figure 3.6 shows, is that nearly nine
out of 10 do not.
FIGURE 3.6
Include Future Gifts When Establishing Spending Policy

100%
92
87
87
86
84
75
80
73
60
40
16
14
20
11
11
11
8
7
6
6
5
5
3
0 Total Over $501 $101 $51 $10 Under
Yes
No
No answer/uncertain
Since this is a new area of inquiry this year, there is no trend to analyze from past Studies.
It will be interesting, however, to follow future developments based on the responses of the
largest endowments to this question. While 8 percent of respondents overall said that they
include future gifts when establishing their spending policy, 16 percent of endowments with
assets over $1 billion endowment do so, as do 14 percent of those with endowments between
$501 million and $1 billion. These larger endowments have more highly evolved development
offices and planned giving programs, so are likely to have a clearer understanding of pro-
spective patterns of future giving. We will be interested to see if endowments across the size
spectrum begin to follow the large endowments lead.
Special Appropriations
Even with the increase in dollars available for spending, participating institutions have not
reduced their use of special appropriations to facilitate spending for specific purposes. In fact,
the proportion of those making special appropriations increased slightly, by one percentage
point, to 16 percent compared with last year and by a full four percentage points above
FY2005s 12 percent. We also note that larger special appropriations were made in FY2007
compared with FY2006; in the current Study, special appropriations were 4.9 percent above
the policy spending rate, well above last years reported 2.6 percent.

FIGURE 3.7
Special Appropriations to Spending in Fiscal Year 2007

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Made special appropriations 16 23 25 19 17 16 4

Percentage above spending rate
represented by special
appropriations 4.9 0.6 0.9 3.8 2.7 7.2 34.7
Where special appropriations

were made:s
Capital campaign costs 30 46 55 41 28 10 0
Annual fund-raising costs 11 38 27 5 6 8 0
Recover administrative costs 20 46 27 10 28 18 0
Indirect cost reimbursement 2 0 0 3 0 5 0
Major campus improvements 28 0 18 31 22 38 50
Investment management fees 10 23 9 8 11 10 0
Capital improvements and
maintenance 5 0 9 5 6 3 25
Debt service 14 0 18 13 17 15 25
Other 23 8 0 15 33 40 0
s
Generally, the larger institutions made greater use of special appropriations roughly a
quarter of endowments in the two largest cohorts made them. Very few endowments in the
under $10 million cohort made special appropriations. When small institutions did make
special appropriations, however, they were proportionally larger34.7 percent over the normal
spending rate in the case of those with endowments under $10 million, and 7.2 percent
above the normal rate for those in the $10 million to $50 million range.
Viewed by type, the differences were minimal except for private colleges and universities, which
reported making special appropriations at a significantly lower rate.
The most frequent uses of funds earmarked through special appropriations were capital
campaign costs, major campus improvements and recovery of administrative costs. The largest
endowments tended to devote their special appropriations to recovery of administrative costs
and to covering capital campaign costs, with annual fund-raising costs not far behind. As a
general observation, the two largest cohorts directed their special appropriations to capital and
fund-raising campaign costs and recovery of administrative costs, while the two smallest
cohorts tended to direct their special appropriations primarily to major campus improvements.
The two cohorts in the middle were most likely to cover capital campaign costs.

For endowments overall, maximizing the likelihood of maintaining intergenerational
equity is the key principle underlying their spending policy. On a scale of 1 (unimportant)
to 5 (extremely important), maximizing intergenerational equity scored an average of 4.3,
followed by deliver a consistent, as well as growing, stream of income to the operating
budget and deliver a consistent stream of income to the operating budget, which are tied
at 4.0. Remain competitive with peer institutions came in at an average of 3.4, while
smooth variations in institutions finances scored 3.3.
FIGURE 3.8
Importance of Principles Underlying Investment Policy

Scale 15 s
$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Maximize likelihood of maintain-

ing intergenerational equity 4.3 4.8 4.8 4.3 4.3 4.2 4.2
Deliver consistent stream of
income to operating budget 4.0 4.2 4.1 4.1 4.1 3.9 3.7
Deliver consistent, as well
as growing, stream of income
to operating budget 4.0 4.3 4.1 4.1 4.1 4.0 4.0
Smooth variations in
institutions finances 3.3 3.5 3.7 3.4 3.2 3.1 3.1
Remain competitive with
peer institutions 3.4 3.6 3.8 3.4 3.4 3.4 3.3
Other 4.6 4.3 5.0 5.0 5.0
s
Average score on a scale of 15 with 5 being high and 1 being low
Viewed by size, there was little change in ranking. For institutions of all sizes, maintaining
intergenerational equity was the highest priority. One university said, Priority is placed on
establishing a spending policy that is consistent with our peer institutions to maximize future
fund-raising potential. A college said that the principle it focuses on is to Earn a total return,
with prudent levels of risk, which is sufficient to maintain in real terms the purchasing power
of endowment assets and support the defined spending policy.
Operating Budgets
Study participants overall report having an operating budget averaging $188.5 million.
The overall average compares with $171.7 million last year, which was the first year this
question was asked. Average operating budget size correlates with size of endowment
fund, as is to be expected.

FIGURE 3.9
Average Operating Budgets for Fiscal Year 2007

Dollars ($) in Millions
$1,800
1,485.4
1,500
1,200
900
600
288.1
188.5
187.8
300
80.5
35.1
12.2
0 Total Over $501 $101 $51 $10 Under
s
592 responding institutions
Viewed by type, public institution systems and their larger student populations have by far
the largest operating budgets, an average of just over $1.2 billion. Because of their large enroll-
ments and operating budgets, public institutions may be viewed as under-endowed on a
per-student basis relative to many private institutions, despite their substantial fund-raising
success in recent years. Private colleges and universities report an average budget of $173.7
million, while independent schools operated on budgets that averaged $19.3 million.
When asked about changes to their operating budget, 92 percent of Study participants reported
increases averaging 6.6 percent. Only 4 percent reduced their budgets; for these institutions
the average reduction was 4.5 percent. Three percent reported no change. The 92 percent that
reported increasing their budget represents a substantial increase from last years 66 percent,
while the average increase of 6.6 percent is roughly level with last years 6.5 percent. The pro-
portion of institutions decreasing their budget, 4 percent, is unchanged, but the size of the
reduction, 4.5 percent, is down from last years 8 percent.
FIGURE 3.10
Changes to Operating Budget for Fiscal Year 2007

$501 $101 $51 $10 Under

Increased budget 92 93 97 93 97 91 86
Average percent increase 6.6 6.6 6.3 6.1 6.8 6.8 7.2
Decreased budget 4 5 3 4 0 2 8
Average percent decrease 4.5 5.2 5.2 3.1 0.0 6.5 4.6
No change 3 0 0 1 3 6 4
No answer/uncertain 1 2 0 2 0 1 2

Viewed by size, 97 percent of institutions in the $51 million to $100 million cohort increased
their budgets. The only cohort where less than 90 percent increased their budget was that with
assets under $10 million, where 86 percent did so. The latter category also led in decreases,
with 8 percent reporting budget reductions. Five percent of institutions with endowments over
$1 billion and 4 percent of those with endowments between $101 million and $500 million
reduced their budgets as well.
Viewed by type, 93 percent of private colleges and universities and independent schools
increased their budgets versus 83 percent for public systems. Independent schools increasing
their budgets showed the largest average increase, 7.1 percent, while among those institutions
that reported decreasing their budgets, public institutions reported the largest reduction, an
average of 6.0 percent. This latter figure may reflect the decreasing levels of state support
being provided to public institutions overall.
In a new area of inquiry, we asked about the percentage of institutions operating budget that
is funded by the endowment. The average was 9.0 percent, but significant fluctuations were
observed when the data are analyzed by size of institution.
FIGURE 3.11
Percentage of Operating Budget Funded by Endowment

$501 $101 $51 $10 Under

Percentage of operating
budget funded by endowment 9.0 15.6 20.4 13.3 9.6 5.1 2.0
Increase 34 50 40 42 34 28 26
Decrease 14 9 17 14 13 16 9
No change 41 29 33 34 39 47 53
Institutions with endowments over $1 billion rely on the endowment for an average of
15.6 percent of their operating budgets, but this figure conceals an enormous range of strat-
egies regarding use of the endowment for budgetary support. At the top end of the spectrum,
one institution in the over $1 billion group relies on its endowment for nearly all of its budgetary
needs (97.0 percent), while at the other end another uses its endowment almost exclusively
for non-operating purposes, with only 0.2 percent of the operating budget coming from the
endowment. The smallest institutions those with endowments under $10 millioncount
on endowment to fund an average of just 2.0 percent of their operating budget. There are sig-
nificant differences, as well, in the other four cohorts. Among institutions with endowments
between $501 million and $1 billion, the endowment funds 20.4 percent of the operating
budget, but the percentage funded is just 5.1 percent among those in the $10 million to
$50 million cohort, and 9.6 percent among those with endowments between $51 million
and $100 million.

Thirty-four percent of institutions increased the percentage of their operating budget funded
by endowment in FY2007, while 14 percent reported decreasing it. Just as the larger institutions
tended to fund more of their budget from endowment than their smaller counterparts, those
in the three largest cohorts were more likely to have increased the share of the operating budget
funded by endowment compared to the three smallest cohorts.
Viewed by type, private colleges and universities and independent schools, at 9.4 percent
and 9.7 percent, respectively, relied on endowment more heavily than all publics, where the
average funded by endowment was just 2.0 percent reflecting their large budgets and
proportionally smaller endowment assets.
Higher Education Price Index (HEPI)

The proportion of Study participants reporting use of the Higher Education Price Index (HEPI)
continued to increase in FY2007, rising to 25 percent from 23 percent in FY2006, 19 percent
in FY2005 and 14 percent in FY2004. Frequency of use was highest among the two largest
cohorts, where 41 percent of institutions in each group reported using HEPI. These two
cohorts also reported the greatest increase in rate of usage. The only cohort where the usage
rate declined (by 1 percentage point) was the under $10 million group.
FIGURE 3.12
How Institutions Use the Higher Education Price Index (HEPI)s

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Use HEPI 25 41 41 32 24 20 13
Use for:
Setting spending rate 28 30 22 24 32 29 36

Budget process 57 48 56 57 44 69 64
As investment benchmark
or hurdle rate 17 26 11 22 12 13 7
Setting tuition 3 4 6 1 4 2 7
Other 12 22 17 15 16 4 0
s
HEPI is most often used in the process of developing budgets. But it is also used in setting
spending rates and, in fact, this use showed a sharp gain year over year, with 28 percent of
respondents reporting using HEPI in this manner versus 19 percent a year ago. Seventeen
percent use it as an investment benchmark or hurdle rate.

For institutions of all sizes, HEPI can be an effective alternative to the Consumer Price Index
(CPI), which measures price changes in a typical basket of consumer goods, particularly in urban
areas. Some items of controversy in the CPI such as the use of the estimated rental cost
of housing as a way of approximating the current purchase cost for a homeare not used in
the computation of HEPI.
Participating institutions cited numerous other ways they use HEPI, including:
As a benchmark for intergenerational equity, costs, inflation, and rate of return

For calculating tuition increases
As a reinvestment benchmark to retain purchasing power
To set endowment objectives
As the basis for inflation assumptions
As a reference
The past five years strong performance in the investment and financial markets has been
good for educational endowments. In FY2007, enhanced market values gave educational
institutions the flexibility to increase their operating budgets and to spend more in
dollar terms.
Endowments fund an average of just 9 percent of all participants annual operating budgets
more for large institutions, but less for the smallest. This relatively small average
figure understates the true value of the endowment to educational institutions as an anchor
to windward in adverse times.
These past few years have been very favorable for educational endowments. This benign
environment gives governing boards the opportunity to take a long-term view of the
future, working with their endowment officers and investment committees to assess their
investment and spending policies to plan for times in which market returns may be
less positive.

Gifts Chapter 4
Gifts to endowment remain an important source of asset growth for the institutions
participating in the 2008 Commonfund Benchmarks Study. In contrast to investment returns,
gifts the original source of most endowment funds add to asset growth every year.
Together with the investment returns retained after spending, these gifts are the source
of future endowment growth.
In an in-depth research paper published in 2005,1 Fred Rogers, Vice President and Treasurer
of Carleton College, and Glenn Strehle, Treasurer Emeritus of MIT, pointed out that the
primary source of endowment funds at American colleges and universities has been gifts from
donors. Further, although endowment growth is often related to successful investment
management, their research showed that for the average institution about one-half of endow-
ment growth came from new gifts over a 10-year period (19942003) and the appreciation
on those gifts.
In this years Study, approximately 5.1 percent of the growth in participating endowments
assets was attributable to gifts. This proportion compares with 4.9 percent in fiscal 2006 and
with a narrow range of 5.4 percent to 5.5 percent reported for each of the three prior years.
Viewed by size of endowment, gifts generated the highest percentage growth for institutions
with endowment assets under $10 million 12.2 percent of FY2007s gain. At the opposite
end of the spectrum, the institutions with endowments over $1 billion raise much larger
dollar amounts, but show proportionately smaller growth percentages: Just 2.4 percent of
endowment growth at the largest institutions came from gifts. Comparing FY2007 to the
prior year, the under $10 million cohort was the only one to register a sizable change up or
down. For these institutions, the 12.2 percent growth this year was considerably ahead of last
years 8.6 percent a reflection, perhaps, of the effect of the last five years favorable market
returns on giving patterns at these institutions.
1 Rogers, Fred and Glen Strehle. Sources of Endowment Growth at Colleges and Universities. Commonfund Institute April 2005.

Viewed by type, the percentage of endowment growth attributable to gifts was greatest
among public systems at 14.9 percentindicating that, relative to their endowments smaller
average size, development efforts among their large alumni bases may be bearing fruit. SIRFs
averaged just 6.1 percent growth from gifts, which may indicate a need to continue building
their development efforts. Independent schools realized 5.2 percent of endowment growth
from gifts, while the comparable figure for private colleges and universities was 3.6 percent.
Because of their large operating budgets relative to endowment assets, public institutions
will need to continue building their endowments from all sources as they seek to diversify
their revenue sources, which many are doing through the SIRF structure. By contrast, private
institutions with large endowments typically have successful and relatively mature fund-
raising programs.
Gifts and Donations

The proportion of institutions reporting an increase in gifts has varied little for the past three
years. Half of participating institutions reported an increase in gifts in FY2007, compared
with 46 percent in FY2006 and 48 percent in FY2005. The proportion of institutions report-
ing a decline, 27 percent, is virtually the same as last years 28 percent. Nineteen percent of
participants reported no change, down from 23 percent a year ago.
FIGURE 4.1
Changes in Gifts and Donations for Fiscal Year 2007

$501 $101 $51 $10 Under

Increase in gifts 50 55 55 48 52 49 47
Median increases 40.1 20.3 56.0 36.0 40.0 41.0 50.0
Decrease in gifts 27 26 24 37 31 23 18
Median decreases 32.0 25.0 32.0 28.0 35.6 34.4 50.0
No change 19 17 18 13 15 21 31
s
Study changed in FY2007 to report median changes
Viewed by size, the biggest gain in institutions reporting increased gifts was in the $501
million to $1 billion cohort, where 55 percent did so, up from 38 percent a year ago. Generally
speaking, smaller endowments saw larger percentage increases than the big endowments,
with institutions in the $51 million to $100 million and $10 million to $50 million cohorts

reporting the largest percentage increases. By contrast, only 26 percent of institutions with
endowments over $1 billion reported a decrease, compared with 39 percent in last years Study.
As they reported the largest percentage increases, so the three smaller endowment cohorts
were also more likely to report the greatest decreases.
Exceptionally large gifts and donations can have the effect of elevating the average or mean
level of gifts. Thus, in the case of gifts, it is useful to analyze the data on a median basis.
When analyzed this way, the median increase in gifts for participants overall is 40.1 percent.
Viewed by size, the median increase in gifts varies considerably among the groups. It is
lowest for the largest institutions, where it is 20.3 percent, and highest for those institutions
with assets between $501 million and $1 billion, where it is 56.0 percent. For the other
size groups, the increase was between 36.0 and 50.0 percent. For those institutions experienc-
ing decreases in gifts, the size of the decrease is generally inversely correlated with the size
of the institution that is, the smaller the institution, the greater the decrease.
Viewed by type, 54 percent of SIRFs reported increases in gifts and donations in FY2007,
while just 44 percent of public systems reported increases indicating that SIRFs may now
be taking the lead in raising funds for public systems. Among institutions reporting increases,
independent institutions saw the largest median increase48.6 percentfollowed by private
schools with a 45.2 percent increase. Private schools experiencing a decline had the largest
median decrease, at 32.0 percent, followed closely by independent institutions at 31.0 percent.
Increases and decreases in gifts can be difficult to analyze on a year-to-year basis because
significant swings in one direction or the other can be the result of one or a few large gifts
particularly at smaller institutions or the timing of a major capital campaign. Says one
college in the South,The capital campaign has been taking resources that otherwise would have
come to the endowment. The campaign is near the end, so we would expect endowment giving
to increase. In addition, according to Rogers and Strehle, bequests, which are not usually
dependent on the economy or recent changes in securities markets, represent a full quarter
of individual giving to higher education.1 Several endowments commented that they had
received a very significant gift, sometimes two. The increase in gifts was the result of two very
large gifts. If these gifts were excluded, the gift level would have remained about the same,
said one Eastern university.
1 Ibid. (p. 11)

New Gifts to Endowment
Total average gifts to endowment per participating institution rose to $8.0 million from
$7.2 million in FY2006 and $7.9 million in FY2005. The higher overall average was entirely
driven by the institutions with endowments over $1 billion, where average giving rose to
$66.5 million from $61.1 million last year. Among the other five cohorts, three showed mod-
est declines in new gifts, one had a modest increase and one showed no change.
FIGURE 4.2
Average Total Amount of New Gifts to Endowment

$80
71.5
66.5
61.1
60
40
22.6
17.1
16.3
20
9.0
8.0
7.9
7.6
7.6
7.2
3.2
2.9
2.7
1.5
1.5
1.4
0.5
0.4
0.4
0 Total Over $501 $101 $51 $10 Under
FY2005/ 663 responding institutions

Viewed by type, public systems were the recipients of an average of $18.8 million in new
gifts, while independent schools averaged just $1.9 million. The average for private colleges
and universities was $10.5 million.
Despite donors generosity, investment returns were the real driver of endowment growth
this year, as in the recent past. This is evidenced by the percentage of participants operating
budgets funded by annual giving, which declined to an average 6.6 percent in FY2007 from
7.1 percent in FY2006 and 7.5 percent in FY2005. As was the case last year, the shrinkage is
almost entirely attributable to a decline at participating public institutions and their related
foundations. This year, public systems and SIRFs together saw a decline to 7.9 percent from
14.3 percent last year.

FIGURE 4.3
Percentage of Operating Budget Funded by Annual Giving

12%
10.1
9.2
8.2
8.1
9
7.9
7.9
7.5
7.4
7.1
6.6
6.5
6.3
5.9
5.9
5.8
5.6
5.6
5.2
6
5.1
4.8
4.3
3
0 Total Over $501 $101 $51 $10 Under


Institutions with endowments over $1 billion saw the percentage of their operating budget
funded by annual giving decline to 4.3 percent from 5.2 percent a year ago. The $101 million
to $500 million cohort experienced a decline to 4.8 percent from 5.9 percent; the $51 million
to $100 million group to 5.6 percent from 6.5 percent; and the under $10 million endow
ments to 8.2 percent from 10.1 percent.
Development Program Costs

In a new area of inquiry this year, we asked about the costs and funding of development
programs and capital campaigns.
As Figure 4.4 shows, the average participating institution spent nearly $2 million on its
development program, including capital campaign costs, in FY2007. As this figure also shows,
costs vary enormously from an average of roughly $13.7 million among the largest insti
tutions to just over $300,000 among the smallest.

FIGURE 4.4
Cost of Development Program, Including Capital Campaign Costss

Dollars ($) in Thousands
$1,600
13,670
1,200
6,391
800
2,699
400
1,924
1,586
804
312
0 Total Over $501 $101 $51 $10 Under
Viewing the data by type of institution, public systems spent the most on development
programs an average of just over $6 million reflecting their large alumni bases. Their
related foundations averaged some $2.5 million. The average for private institutions was
nearly $2.4 million, and for independent schools it was slightly over $800,000.
From this information we can derive the cost of fund-raising as a percentage of the funds
received. The average of gifts to endowment for all institutions in this Study is $8.0 million
while the cost of raising those gifts averaged about $1.9 million, meaning that costs averaged
about 23.8 percent of gifts, or roughly a 4:1 ratio of gifts to costs.
On that basis, the smaller institutions clearly suffer from a lack of economies of scale.
Among those with endowments under $10 million, the ratio of gifts to costs appears to be
barely positive, with approximately $1.30 being taken in for every dollar spent. Among
the next larger cohort, institutions with endowments between $10 million and $50 million,
the ratio was about $1.90 taken in for each dollar. In the group with assets over $1 billion,
nearly $5.00 comes in for every dollar. In the middle are the institutions with assets between
$101 million and $500 million, at $2.80 per dollar, and those with assets between $501
million and $1 billion, at $2.60 per dollar.
Viewed by type, private institutions took in about $4.40 for every dollar spent on development;
independents received $2.35 for every dollar; and all publics, including SIRFs, received
$3.28 for every dollar.

How are development programs funded? Generally through operating funds, as Figure 4.5
shows. After that, unrestricted gifts, endowment management fees, and income and cash
balances fund development programs.
FIGURE 4.5
Funding of Development Programss

$501 $101 $51 $10 Under

Operating funds 95 74 96 94 97 97 98
Unrestricted gifts 28 26 27 20 23 33 33
Endowment management fees 14 39 19 17 10 12 10
Income and cash balances 14 30 8 13 13 15 14
Administrative fees assessed
on new gifts 8 4 12 9 8 7 6
Other 2 0 4 2 3 3 1
s
Endowments in the over $1 billion category are least likely to use operating funds for
development programs just 74 percent do so, versus 95 percent or more for all other size
cohorts. Compared with their larger counterparts, the two smaller cohorts are somewhat
more likely to use unrestricted gifts to fund development costs.
Viewed by type, 99 percent of private institutions and 98 percent of independent schools

make use of operating funds to support development costs, whereas only 82 percent of public
systems and their foundations support development in this way. SIRFs are most likely to
call on unrestricted gifts60 percent do sowhile only 20 percent of private institutions
and 22 percent of independent schools do.
While operating funds are almost always called on to fund the development office and related
expenses, this source is less likely to be tapped in support of capital campaigns. Just 69 percent
of the institutions in the Study universe rely on operating funds to support capital campaigns,
while 38 percent use unrestricted gifts, as shown in Figure 4.6.

FIGURE 4.6
Funding of Capital Campaignss

$501 $101 $51 $10 Under

Operating funds 69 69 80 69 73 63 76
Unrestricted gifts 38 25 35 34 35 43 38
Endowment management fees 13 44 15 18 6 9 10
Income and cash balances 12 25 5 12 9 11 14
on new gifts 10 13 10 13 8 8 10
Campaign funds raised 6 0 0 2 6 9 6
Other 5 0 10 6 6 4 6
s
Once again, the practice among the institutions with endowments over $1 billion is different
from the others, as only 25 percent use unrestricted gifts to support capital campaigns.
An even bigger variance between the largest endowments and the five other size cohorts
can be seen in the use of endowment management fees; 44 percent of the institutions with
endowments over $1 billion use this approach, while the next highest incidence of such
use among the other size categories is 18 percent. Similarly, 25 percent of endowments over
$1 billion use income and cash balances, while the highest proportion taking this approach
among the other size cohorts is 14 percent.
When viewed by type, private colleges and universities call more often on operating funds
to support capital campaigns 78 percent, compared to 69 percent overall and 54 percent
among independent schools. Public systems and SIRFs are far more likely to use endowment
management fees and income and cash balances than are private institutions and indepen-
dent schools.
Comments from many participating institutions indicated that they are not currently engaged
in capital campaigns, perhaps suggesting that they have no set approach for funding capital
campaigns or development programs and decide on a case-by-case basis when the time comes.
Some were more systematic, such as the independent school that said, A portion of develop-
ment and all capital campaigns is funded by an incremental endowment draw. The practice
of taxing giftsor withholding a percentage to cover administrative or other costsdrew
two comments: A public university on the West Coast said, The university will likely move
in the direction of taxing future gifts; however, this has not yet been implemented, while an
independent school noted, We disagree with taxing gifts.

Foundation Investment Pool Assets
When asked if their investment pool includes foundation assets, 5 percent of respondents
replied in the affirmative. Seven percent have a separately administered foundation. The average
market value of foundation pool assets on June 30, 2007 was $173.5 million.
FIGURE 4.7
$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Investment pool amount

includes foundation assets (%) 5 14 14 5 5 3 1
Has separately administered
foundation (%) 7 11 0 7 8 8 7
Market value of foundation
investment pool at June 30, 2007
($ in millions) 173.5 620.3 130.2 197.0 36.0 24.9 19.3
Larger endowments are far more likely to have an investment pool that has foundation
assets in it. For endowments with assets above $1 billion and for those in the $501 million to
$1 billion range, the incidence is almost triple the average. The two middle cohorts fall
exactly on the overall average, while the two smaller cohorts are below it.
Viewed by type, public systems are far more likely to have an investment pool that includes
foundation assets, and slightly more than half have SIRFs. Similarly, the market value
of foundation assets is far greater for public systems than it is for private institutions and
independent schools.
Underwater Funds
Among all institutions, income available for spending from endowment gifts can be adversely
affected by state law and the accounting rules related to endowment funds that have fallen
below their historic dollar value at the time of donation. The proportion of institutions report
ing these underwater funds continued to decline in FY2007 as investment markets main-
tained positive momentum. Just 16 percent report having underwater funds, down from 28
percent in FY2006 and 33 percent and 44 percent, respectively, for FY2005 and FY2004.

FIGURE 4.8
Institutions Reporting Underwater Funds

60%
52
43
40
39
38
38
36
40
33
29
28
26
23
23
21
19
20
16
16
13
10
8
5
0 Total Over $501 $101 $51 $10 Under

Viewed by size, the incidence of institutions reporting underwater funds is uneven. Twenty-
one percent of the largest endowments and 23 percent of the $101 million to $500 million
cohort report having them, while just 5 percent of the smallest endowments report underwater
funds. For the other three size cohorts, the incidence of underwater funds ranges from
1319 percent.
Viewed by type, independent schools and public systems are least likely to have underwater
funds (11 percent each), while 21 percent of SIRFs, 18 percent of private colleges and univer-
sities and 17 percent of public systems (including their foundations) report having them.
Of greater significance relative to the underwater funds issue, the average percent of the typical
endowment that is underwater is just 1.7 percent, down considerably from 6.2 percent
last year.
Of interest, while the endowments with assets under $10 million are least likely to have
underwater funds, they have the largest percent of endowment still underwater at 3.7 percent.
Their neighboring $10 million to $50 million cohort is next at 3.1 percent. For all three of
the larger groupings, less than 1 percent of the endowment is underwater.

FIGURE 4.9
Percentage of Endowment Underwater for Fiscal Years 2005, 2006 and 2007
8%
7.2
6.4
6.2
6
5.2
4.7
4.6
3.7
4
3.1
3.0
3.0
2.8
1.9
1.7
1.7
2
0.9
0.9
0.8
0.5
0.5
0
0 Total Over $501 $101 0
$51 $10 Under

Viewed by type, independent schools report that 3.3 percent of their funds are below their
original market value compared to 1.3 percent and 1.2 percent, respectively, for private insti-
tutions and public systems (including SIRFs).
The problem of underwater funds will continue to diminish if securities markets remain
strong and would be eliminated entirely in most states by the passage of the proposed Uniform
Prudent Management of Institutional Funds Act (UPMIFA), which to date has become law
in 13 states and the District of Columbia.
UPMIFA replaces the use of historic dollar value with a more flexible spending standard
for the use of nonprofits in making decisions about whether to make expenditures from their
endowments. Trustees will be able to spend or accumulate as much of an endowment fund
including principal or income, realized or unrealized appreciationas they deem prudent,
taking into account the intended duration of the fund, the funds purposes, economic
conditions, expected inflation, investment returns, other resources of the institution and the
investment policy.
Gifts clearly remain a tremendously important source of endowment growth. Yet, a range
of crosscurrents is at work when coming to conclusions about gifts. With rising annual
operating budgets, institutions need to increase their annual gift inflow simply to match the
pace of rising expenses. At the same time, higher giving rates and the increased size of
gifts (both this year and last) are positive factors that highlight the importance of continued
emphasis on professionalism and long-range planning in the development function.

Chapter 5 Debt
Fiscal year 2007 offered a very different interest rate environment than did FY2006.
In August 2006 the Federal Open Market Committee (FOMC) voted not to raise its key
short-term Fed funds rate for the first time after 17 successive quarter-point increases.
Indeed, it kept the Fed funds and discount rates steady through the remainder of the
fiscal year (but began lowering both rates shortly thereafter).
The results of this years Study show that educational institutions found the stable rate
environment hospitable. At the same time, however, more institutions reduced debt
than added to it over the past 12 months. And, looking ahead, participants are taking
a conservative stance, as the majority express no plans to increase debt loads in the
next two years.
Debt Load
Among Study respondents reporting that they carry debt at present, average total debt
increased to $101.4 million from $87.1 million in FY2006 and $79.8 million in FY2005.
Average debt service as a percentage of the operating budget fell slightly, however, to
4.9 percent from 5.0 percent. Public institutions, which are on average larger, reported
average debt of $511.6 million, up from $409.5 million, while total debt for private
institutions and independent schools averaged $102.6 million and $17.1 million, respec-
tively. While SIRFs had small average debt loads at $30.2 million, they also had the
highest debt service as a percentage of operating budget at 8.4 percent.

FIGURE 5.1
Debt Levels for Fiscal Year 2007
$501 $101 $51 $10 Under

Average debt ($ in millions) 101.4 648.0 174.2 118.0 51.2 18.5 8.4
Debt service as a percentage
of operating budget 4.9 4.4 4.8 5.4 4.8 4.3 5.2
Percentage of debt that is
fixed rate 73 69 76 75 79 71 68
Average interest rate 4.7 4.6 4.7 4.6 4.6 4.6 4.9
floating rate 27 31 24 25 21 29 32
Average interest rate 4.4 5.6 3.9 4.0 4.0 4.5 4.6
Viewed by size, average debt among institutions with endowments over $1 billion jumped
to $648.0 million from $555.3 million, while debt service as a percentage of the operating budget
rose to 4.4 percent from 3.6 percent. The largest endowments, together with the smallest
endowments, were more likely to have floating rate debt in the range of 31 percent of total
debt. Overall, participating institutions reported that an average of 27 percent of their debt
was floating rate. The average interest rate on their floating rate debt was 4.4 percent versus
a 4.7 percent rate on the fixed component.
Debt levels changed little in FY2007 compared to FY2006. This years Study shows that
29 percent of total participants increased debt versus 30 percent last year, and that 41 percent
decreased debt compared with 43 percent a year ago.
FIGURE 5.2
Changes to Debt in Fiscal Year 2007

$501 $101 $51 $10 Under

Increased debt 29 62 41 32 33 23 14
Decreased debt 41 24 35 46 42 41 40
No change 29 14 24 21 24 35 46
Large institutions were more likely to increase debt than smaller ones. Among the endowments
over $1 billion and those with assets between $501 million and $1 billion, 62 and 41 percent,
respectively, increased debt. By contrast, 23 and 14 percent, respectively, of endowments with
assets between $10 million and $50 million and below $10 million increased debt loads.
Similarly, the smaller endowments reduced debt more aggressively. Among the four smaller
cohorts, the percentage of those reducing debt ranged from 4046 percent, compared with
a range of 24 35 percent for the two larger ones.

Viewed by type, 62 percent of public institutions increased debt, as did 37 percent of private
colleges and universities but just 17 percent of independent schools. Forty-seven percent of
private institutions and 43 percent of independents decreased debt, compared to 24 percent
of all publics.
Looking to the future, only 28 percent of all participants said that they plan to increase debt
in the next two years, while 65 percent said that they do not plan an increase. The two largest
cohorts appear to be thinking in different ways when it comes to this aspect of their plans.
Among the over $1 billion cohort, 52 percent say that they plan an increase, 38 percent say
they do not. Among the endowments with assets between $501 million and $1 billion,
32 percent say they are contemplating an increase, while 56 percent say they are not. Among
all size groups, the two smallest cohorts say that they are least likely to increase debt load.
FIGURE 5.3
Plan to Significantly Increase Debt in Next Two Yearss

100%
76
75
80
65
58
58
56
60
52
38
34
40
32
32
28
20
18
20
12
10
10
8
7
7
4
0 Total Over $501 $101 $51 $10 Under
Yes
No
No answer/uncertain
s
698 responding institutions
Just as a greater proportion of public systems increased debt in FY2007 compared to other
types of institutions, so too do a greater proportion of them50 percentanticipate increas-
ing debt in the next two years. But just over one in 10 of their related foundations plan an
increase, lowering the total for all publics planning an increase to 22 percent. Thirty-three
percent of private colleges and universities are planning an increase, as are 24 percent of
independent schools.

Debt Policies
The proportion of respondents with debt indicating that they have a formal debt policy
increased again this year, to 30 percent from 28 percent last year and 23 percent the year
before that.
FIGURE 5.4
Have Formal Debt Policys

100%
80
76
76
80
67
65
58
60
52
41
37
40
30
27
21
18
17
20
7
6
5
5
3
3
0 Total Over $501 $101 $51 $10 Under
Yes
No
No answer/uncertain
s
5 52 responding institutions
Once again, the presence or absence of such a policy correlates with the size of the responding
institution: the larger institutions are likely to have a debt policy, while the smaller ones are not.
It is somewhat surprising that only among the two largest size cohorts are those with a debt
policy in the majority.
Viewed by type, public systems are most likely to have a debt policy55 percent say they do
while independent schools, at 18 percent, are least likely to have one.

Response to Current Interest Rate Environment
The steady interest rate environment of FY2007 meant that educational institutions use
of interest rate swaps showed little change. The proportion of Study participants using them
remained unchanged at 45 percent. By contrast, the rising rate environment of FY2005
led the use of interest rate swaps to increase last year to 45 percent from the 37 percent
reported in FY2005.
FIGURE 5.5
Use of Interest Rate Swaps to Manage Exposures

100%
74
80
65
62
56
56
60
52
48
48
45
42
38
38
40
30
26
20
5
4
3
2
0
0 Total Over $501 $101 $51 $10 Under

Use
Do not use
No answer/uncertain
s
5 52 responding institutions
Institutions in the $501 million to $1 billion cohort were most likely to use swaps at 74
percent, while 62 percent of endowments with assets over $1 billion used them. Endowments
in the three smallest cohorts were least likely to use swaps. Viewed by type, 47 percent of
private endowments and 48 percent of independents use swaps while 32 percent of public
systems/SIRFs report using them.
In the stable interest rate environment that prevailed in FY2007, educational endowments
average debt load increased overall but more endowments reduced debt than added
to it. There is nonetheless some wariness about the future direction of rates, as indicated
by the nearly two-thirds of Study participants that do not plan on increasing debt in the
next two years.

Resources, Management Chapter 6
and Governance
In FY2007, the average number of investment management firms used by endowments rose
again (albeit moderately) and, as we saw in Chapter 2, allocations to alternatives which
require more time and attention to manage rose as well. In addition, staffs and investment
committees worked to put into place practices to comply with the guidelines issued by the
American Association of Certified Public Accounts (AICPA) in 2006 concerning the valuation
of illiquid assets. In a turnaround from recent years, the average number of staff members
rose very slightly. Still, the resources available are not increasing in proportion to the volume
and complexity of the supervisory and fiduciary tasks at hand. Smaller institutions, in
particular, must monitor a growing number of alternatives managers with a staff that is usually
less than one full-time equivalent (FTE). It is encouraging to note, however, that these
small institutions are meeting greater success in attracting investment professionals to their
investment committees.
FIGURE 6.1
Average Number of Separate Investment Firms Used

in Fiscal Years 2005, 2006 and 2007
Average Number of Firms Used
100
75.6
75.1
80
64.9
60
40.2
40.0
33.7
40
18.4
18.0
17.2
15.4
14.6
13.0
10.3
20
10.0
9.7
5.4
5.3
5.3
2.4
2.1
1.7
0 Total Over $501 $101 $51 $10 Under



Manager Use
The average number of investment managers that endowments use increased again in FY2007,
to 15.4 from 14.6 last year. Overall, however, there was little change when viewed by size cohort.
In last years Study, the endowments with assets over $1 billion increased the average number
of managers used to 75.1 from 64.9 the year before. This year, the average number inched up
to 75.6. For endowments in the $501 million to $1 billion range, the average number of
investment management firms decreased slightly, going to 40.0 from 40.2 last year. Similar
small changes, up or down, were also observed for the other size cohorts, with the greatest
changes occurring among endowments with assets under $10 million, where the average number
of investment management firms declined to 1.7 from 2.1, and among endowments with assets
between $101 million and $500 million, where it increased to 18.4 from 18.0.
Viewed by type, public systems reported that they employ an average of 21.8 investment
management firms, while their related SIRFs employ 13.2 on average. The average for private
colleges and universities is 19.8 and for independent schools 7.6.
Viewed by asset class, the number of managers used remains quite stable. The only significant
change by asset class among the overall Study population occurs, again, in the alternative
strategies (direct) category, where an average of 15.8 separate management firms were employed
in FY2007 versus 14.6 a year earlier. Almost all of that change can be attributed to the endow
ments with assets over $1 billion moving up to an average of 59.6 separate direct alternative
managers, from 57.0 in FY2006.
FIGURE 6.2
Average Number of Managers Used by Asset Class in Fiscal Years 2006 and 2007
Average Number of Managers Used
$501 $101 $51 $10 Under

741 767 45 56 45 44 202 210 107 106 238 246 104 105
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Domestic equities 3.8 3.8 7.7 7.6 6.3 6.1 4.9 4.8 4.0 4.4 2.7 2.6 1.6 1.4
Fixed income 1.9 1.9 3.0 3.1 2.8 2.5 2.0 2.0 2.0 2.1 1.7 1.7 1.4 1.3
International equities 2.6 2.8 6.5 7.5 4.7 4.5 2.6 2.8 2.0 2.4 1.7 1.7 1.5 1.3
Alternative strategies (direct) 14.6 15.8 57.0 59.6 25.5 25.7 9.4 9.6 3.5 3.0 2.4 2.4 1.7 1.0
(fund-of-funds) 3.0 3.2 5.9 3.6 3.5 5.0 3.8 4.2 2.6 2.7 1.8 1.8 1.3 1.3

Perhaps the only other observation to be made when viewing the number of managers by
specific asset class is with respect to international equities. Overall, the number of investment
management firms used for this asset class increased to 2.8 from 2.6. The greatest increase,
once again, was with the largest endowments, which retained an average of 7.5 international
equity managers this year against 6.5 a year ago. Among the other five size cohorts, two
reduced the number of international equities managers used, two increased it and one left
it the same.
The fact that additional managers were hired for alternative strategies and international
equities allocations is consistent with patterns of past years as well as with endowments
expressed intentions (as shown in Figure 2.15) that they will continue allocating more funds
to these asset classes. However, just as the changes this year were relatively small compared to
years past, so too are respondents statements regarding changes contemplated for the future,
mostly in the case of international equities.
Viewed by type of institution, private colleges and universities reported using 17.1 direct
alternatives managers in FY2007, up from 15.4 a year ago, while independent schools used
6.8, up from 6.1. Institutions in the public only category used 24.4, well ahead of last
years 19.9, and SIRFs used 16.2, compared to 15.8 last year.
Use of fund-of-funds managers for alternatives was relatively stable overall at 3.2 managers,
up from an average of 3.0 managers last year. But major changes occurred among the largest
endowments. This year, endowments with assets over $1 billion reported using an average
of 3.6 funds-of-funds managers for alternative assets, down sharply from an average of 5.9
a year ago. At that time, we believed that the growth in allocations to funds of funds reflected
a desire for greater diversification. This year, it appears that the largest endowments are still
seeking greater diversification but through an increase in direct relationships. All of the
other size cohorts kept the number of fund-of-fund manager relationships the same or
increased them.
The percentage of marketable alternative investment assets placed directly (among those
institutions having allocations to marketable alternatives) fell dramatically this year, to
40 percent from 77 percent in FY2006 and 72 percent in FY2005. While all size categories
reduced their directly-managed marketable alternative allocations, the bulk of the change
can be attributed to the three combined categories of institutions in the $10 million to $500
million range. This increase may reflect the active marketing of funds of funds by large
financial services firms as well as a desire on the part of these endowments to achieve further
diversification and minimize ongoing due diligence and monitoring tasks. This is consistent
with the higher staffing levels seen at larger endowments: As Figure 6.3 shows, the larger the
endowment the greater the percent of marketable alternative investment assets placed directly,
and the greater the number of separate direct marketable alternatives managers used.

FIGURE 6.3
Direct Investment in Marketable Alternative Investments and Number of Marketable Alternatives Managers Used
in Fiscal Years 2006 and 2007
$501 $101 $51 $10 Under

Responding institutions 410 447 45 54 41 41 168 174 67 77 84 98 5 3
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Average percentage of
marketable alternatives
allocation placed directly 77 40 83 81 80 72 73 41 76 23 78 19 s s
Average number of separate

managers used 9.7 9.4 21.0 21.9 11.0 10.8 6.3 6.5 4.1 3.1 4.1 2.6 s s
s
Viewed by type, private institutions placed 44 percent of marketable alternative investment

assets directly, with public systems placing 39 percent and their foundations placing 33 percent.
SIRFs used the greatest number of direct marketable alternatives managers, an average of
13.5, while independent schools used the fewest 4.4 on average.
Cost of Managing Investment Programs

Endowments report that the cost of managing their funds has continued to increase, rising
to an average of $2.29 million for all institutions, from $1.98 million in FY2006 and $1.62
million in FY2005.
FIGURE 6.4
Cost of Managing Investment Programs for Fiscal Year 2007
$501 $101 $51 $10 Under

Average cost ($ in thousands) 2,289 25,717 4,904 1,453 324 130 20
The largest endowments in the Study, which use alternative strategies more heavily, have
historically paid more in dollar terms for management and this trend continued in the
FY2007 Study. For the cohort with assets over $1 billion, costs rose to $25.7 million from
$23.0 million. For the next two largest cohorts, costs also increased sharply for the $501
million to $1 billion cohort, where they rose to $4.9 million from $4.4 million the year
before. Costs also rose for the $51 million to $100 million category but were basically flat
for those in the $10 million to $50 million grouping. For the smallest institutions, costs
fell to an average of $20,000 from $23,000 last year.1
1 Due to a data processing error, last years number was incorrectly printed as $273,000.

What do educational endowments include in their costs? The vast majority 94 percent
include asset management fees and mutual fund fees. After that, most count direct expenses
(54 percent), outsourcing /internal staff and consultant fees (49 percent) and incentive/
performance fees paid to asset managers (25 percent).
FIGURE 6.5
Included in Cost Calculationss

$501 $101 $51 $10 Under

Asset management fees and

mutual fund expenses 94 95 91 96 88 92 98
Direct expenses 54 84 78 75 52 39 15
Incentive/performance fees
paid to asset managers 25 53 41 36 18 15 8
Outsourcing/internal staff
and consultant fees 49 87 75 71 47 31 8
Other 3 13 9 4 3 0 0
s
In general, the institutions with endowments over $1 billion are more likely to include all
of the four cost categories mentioned in the preceding paragraph in their cost calculations.
Although 98 percent include management fees and mutual fund calculations, endowments in
the under $10 million grouping include other costs at a far lower rate than other Study
participants, suggesting they may have a less clear understanding of their costs.
In this regard, it is important to note that since the inception of the Benchmarks Studies,
reported fees have been variabledue, evidently, to the difficulty experienced by respondents
in calculating fees accurately. We must accordingly recommend that caution be used in
interpreting these responses.
This observation is supported by a number of verbatim comments. A Midwestern university

commented, [We] dont calculate specific costs and dont have a good number for [the] total.
Another university from the same part of the country said some figures are estimates of fees,
while a private college in the South said it cannot break out fees except for consultant.
One private college in the East said, Fees are particularly high this year due to performance-
based fees. The majority of these fees are not paid by the college, but deducted from our
returns/distributions.
Viewed by type of institution, more than 90 percent of each category count asset management
fees and mutual fund expenses in their cost calculations. After that, however, the picture is
less clear. For example, only 39 percent of independent schools include direct expenses, and
only 22 percent of SIRFs include incentive and performance fees paid to investment managers.

Professional Staffing
As we have noted in previous Studies, a well-trained and capable staff can make an important
difference in smooth operations and prudent risk management for a fund, particularly when,
as here, large numbers of direct alternative managers are being employed. The importance
of staff support was made even clearer in July 2006 when the AICPA released a set of guidelines
for the valuation of illiquid investments such as private equity, venture capital and marketable
alternatives.
The AICPA guidelines emphasize the duty of institutions, as fiduciaries, to inform themselves
about the contents of their alternative investment portfolios and the risks involved in alternative
investing as part of arriving at a fair valuation of these investments. Institutions are now
required, as part of the audit of their portfolios, to make inquiry of their managers as to the
nature of the strategy, the types of investments being made and the risks being incurred.
These activities must be documented and form part of the audit file for the institution.
FIGURE 6.6
Professional Staffing of Investment Function

Average Number of FTEss
15
11.5
11.5
11.4
10
5
2.1
2.0
1.9
1.4
1.3
1.2
1.0
0.9
0.9
0.4
0.4
0.4
0.3
0.3
0.3
0.3
0.2
0.2
0 Total Over $501 $101 $51 $10 Under

s
Average number of full-time equivalents
We are encouraged to see that for endowments overall the average number of full-time
equivalent (FTE) staff increased to 1.4 in FY2007 from 1.3 in FY2006 and 1.2 in FY2005.
Still, for four of the six size categories the average number of FTEs was unchanged. While
still not back to the 12.5 FTEs observed in FY2004, the institutions with endowments over
$1 billion at least held their staffing level over the past year. The only changes were a slight
decline among the endowments between $501 million and $1 billion (to 2.0 FTEs from 2.1)
and a slight increase among the endowments under $10 million (to 0.3 FTEs from 0.2).

Viewed by type, institutions in the public only category tend to have somewhat larger
staffs than the average at 2.6 FTEs, unchanged from a year ago. Independent schools have
the smallest staffs at 0.8 FTEs, but up from 0.3 FTEs last year.
It is somewhat discouraging to see staffing levels remain so thin, given the excellent returns
endowments have enjoyed for the past few years. It is to be hoped that a less hospitable invest-
ment environment, when it arrives, will not lead to staff reductions.
When we analyze the composition of staff by title, chief financial officer occurs most
frequently, with 68 percent of participants reporting that they have a CFO. Sixteen percent
have an analyst on staff and 15 percent report having a chief investment officer (CIO).
Other positions are portfolio manager (7 percent) and researcher (4 percent).
FIGURE 6.7
Composition of Professional Staffs

$501 $101 $51 $10 Under

CFO 68 17 38 64 88 80 ss
Other financial professional 34 26 26 46 35 33 ss
CIO 15 80 40 15 3 2 ss
Portfolio manager 7 50 14 2 2 4 ss
Analyst 16 83 40 18 4 2 ss
Researcher 4 28 10 1 2 1 ss
Other investment professional 3 13 14 3 1 1 ss
Other 8 22 12 5 5 7 ss
sMultiple responses allowed

ssSample size too small to analyze
The chief investment officer position is found predominantly at larger endowments.

Eighty percent of endowments over $1 billion have a CIO, as do 40 percent of institutions
in the $501 million to $1 billion category. After that, 15 percent of endowments in the
$101 million to $500 million grouping have a CIO, while among the three smaller cohorts
CIOs are to be found at an average of about 2 percent of institutions. The two larger
cohorts are also where the analyst title is most likely to be found.
With the CFO title, the pattern just described is the reverse it is far more likely that the
smaller institutions will have a CFO, compared to their larger counterparts. This indicates that
a generalist financial executive or business manager has responsibility for investments at smaller
institutions, while a specialist CIO leads investment management at larger institutions.

Viewed by type, the CFO title appears at 67 percent of private colleges and universities,
87 percent of independent schools and 49 percent of public systems and their related
foundations. Public systems are most likely to have a CIO the title may be found at
25 percent of respondents in this category while independents, at 2 percent, are
least likely to have the title.
Sixty-one percent of Study participants use an outside consultant. Viewed by size, very
large, large and mid-sized endowments use consultants with the greatest frequency.
Endowments with assets over $1 billion use them at the same 61 percent rate as all Study
participants, and endowments with assets under $10 million use them at the lowest
rate, 10 percent.
FIGURE 6.8
Consultant Uses
$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Use consultant 61 61 93 87 76 48 10
Services usedss
Asset allocation/rebalancing 87 59 80 91 89 91 80
Manager selection 87 62 85 93 91 84 50
Policy review 78 56 66 81 88 80 60
Performance attribution and
measurement 87 65 76 92 91 88 60
Outsourced investment
management 28 6 12 25 28 41 40
Other 6 15 15 5 1 3 10

ss468 responding institutions
Viewed by type, private colleges and universities make the most use of consultants at
70 percent, while independent schools make the least use of them at 44 percent.
Eighty-seven percent of the Study universe reported using consultants for three things:
1) asset allocation/rebalancing; 2) manager selection; and 3) performance attribution and
measurement. Seventy-eight percent use them for policy review. Twenty-eight percent
of respondents outsource investment management to consultants.
Endowments with assets over $1 billion make significantly less use of consultants for all
services. To a lesser extent, the same holds for endowments in the $501 million to $1 billion
range. Large endowments ($101 million to $500 million), mid-sized endowments
($51 million to $100 million) and small endowments ($10 million to $50 million)

fairly closely parallel the overall use of consultants. Endowments in the under $10 million
cohort generally use consultants less for all services than their somewhat larger counterparts.
Viewed by type of institution, there are not significant differences in usage rates for various
consultant services.
Aware that consultants can encounter conflicts of interest, 68 percent of Study participants
report that their consultant has a conflict of interest policy. Typically, these conflicts of
interest revolve around managing investment funds while simultaneously advising on invest-
ment managers to be retained for the same asset classes and strategies. Other conflicts
are collecting fees from managers they are recommending, or collecting advisory fees and
placement fees at the same time.
FIGURE 6.9
Consultants Conflict of Interest Policys

80%
71
71
70
68
66
65
60
50
40
20
0 Total Over $501 $101 $51 $10 Under

The rate at which institutions have consultant conflict of interest policies varies relatively
little among institutions of various sizes. (An exception is the under $10 million category,
where the low number of responding institutions makes it difficult to draw conclusions.)
Changes to Staffing
Most institutions82 percentmade no changes to staffing in fiscal 2007. As Figure 6.12
indicates, the changes reported were small. Only 1 percent hired a CFO or CIO; 2 percent
a portfolio manager; and 4 percent an analyst. The smallest endowments were somewhat
more likely to make greater use of their boards and investment committees 9 percent say
they didor to fully outsource the investment function (2 percent). The two largest cohorts
were more likely to outsource to a consultant, at 5 percent each, versus no more than
2 percent among other cohorts.

FIGURE 6.10
Changes to Staffings in Fiscal Year 2007

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Hired in-house
CFO 1 0 0 1 1 2 1
CIO 1 7 5 2 0 0 0
Portfolio manager 2 16 5 0 1 1 0
Analyst 4 32 9 4 0 0 0
Researcher 0 5 0 0 0 0 0
Other professional 3 13 11 2 1 2 2
Increasing use of board/
committee 6 2 2 6 5 7 9
Outsourcing to consultant 2 5 5 2 2 2 0
Outsourcing to manager(s) 0 0 0 0 0 1 0
Fully outsourced investment
functions 1 0 0 0 1 1 2
Other 2 5 7 3 3 1 0
None 82 43 66 82 89 87 89
s
Viewed by size, the most notable variations occurred among the largest endowments.
Compared to the 4 percent of the Study population that hired an analyst, 32 percent of
these endowments did so. In addition, compared with the 3 percent of Study respondents
in general that hired a professional of some other type, 13 percent of the largest endowments
reported doing so. These two positions were also staffed at a greater rate by very large
endowments in the $501 million to $1 billion category.
Viewed by type, there were not great variations among the five categories. Independent
schools and SIRFs tended to make greater use of their boards and investment committees.
Investment Committees
The average size of the investment committee among participating endowments has
become somewhat smaller in the past few years. This year, the average investment committee
had 7.6 voting members on it, down from 7.8 last year and 8.2 members in FY2005 and
FY2004. This years moderate downsizing can be attributed to the largest endowments,
which reduced the size of their committees to an average of 8.9 voting members from
10.2 a year ago and 11.3 in FY2005.

FIGURE 6.11
Average Number of Voting Members on Investment Committee

Average Number of Voting Investment Committee Members
15
11.3
12
10.2
9.2
9.0
8.9
8.9
8.8
8.8
8.7
8.7
8.2
8.0
9
7.8
7.8
7.6
7.3
7.0
6.8
6.2
6.1
5.9
6
0 Total Over $501 $101 $51 $10 Under

FY2005/729 institutions
Overall, investment committees tend to be smaller at smaller endowments. Viewed by

type, SIRFs had the largest average number of voting members on the investment committee
at 8.3, followed by private colleges and universities at an average of 7.9.
It can be observed that the largest endowments are hiring more staff members (Figure 6.7)
and modestly trimming the size of their investment committees. Both developments have
positive aspects: More professionals are available to manage larger and increasingly complex
endowments, and smaller committees tend to be more efficient and focused. If smaller endow-
ments are planning to make greater use of their boards and committees, then those investment
committees may need to be enlarged in order to manage the workload effectively.
Of the average 7.6 voting members on investment committees, an average of 1.6 members
are non-trustees.
Comments indicate that a number of Study participants assign investment management

responsibility to the finance committee. Some institutions make investment decisions at the
board level with no separate investment committee, while for others the investment com
mittee is not a board-level committee. One private university in the South says the investment
committee is structured as a subcommittee of the finance committee. An independent
school reports an investment committee of 20 people, including eight members who do not
vote and two who are ex officio. The latter do not attend meetings but can vote.

The largest endowments have an average of 2.3 voting members on their investment
committees who are not trustees. But they also have the largest investment committees
an average of 8.9 members. Still, the endowments with assets over $1 billion have a
larger percentage of voting investment committee members who are not trustees compared
with the other five cohorts.
Viewed by type, public systems are most likely to have the highest average number of
non-trustee voting investment committee members at 2.7.
FIGURE 6.12
Investment Committee Credentials for Fiscal Years 2006 and 2007
$501 $101 $51 $10 Under

741 767 45 56 45 44 202 210 107 106 238 246 104 105
06 07 06 07 06 07 06 07 06 07 06 07 06 07
Average number of investment
committee members that
are investment professionals 4.3 4.3 7.8 7.1 6.1 6.3 5.1 5.2 4.1 3.9 3.4 3.5 2.8 2.9
committee members with
alternative strategies experience 2.9 3.1 5.6 5.4 4.1 4.4 3.0 3.5 2.4 2.5 2.3 2.5 1.5 1.9
Average number of non-trustee

voting members s 1.6 s 2.3 s 2.1 s 1.7 s 1.2 s 1.5 s 1.3
s
Question added to Study for FY2007
Overall, a little over half of investment committee members are investment professionals.
Of the 7.6 voting members on the average investment committee, 4.3 are investment
professionals and 3.1 have experience with alternative investments. At the largest institu-
tions, this proportion is around four-fifths, while at the smaller institutions it is just about
half. It is encouraging to note that this proportion has been increasing, albeit modestly, over
the years at these smaller institutions, a move indicating increasing professionalization of
the investment function.
We also note a slight increase in the number of investment committee members with
alternative strategies experience among every cohort but the largest and smallest. In the
case of the largest endowments it is consistent with the smaller size of the investment
committee itself as shown in Figure 6.12.
Participants may define investment professionals in various ways, according to the

comments that we received on this question. Says one private university in the South,
One active member is a person of wealth who manages his family wealth full-time
and is quite experienced in financial management, although not a trained professional.
A university foundation includes high net worth investors in its definition of invest-
ment professional. Others include a retired bank president, two retired professionals
and committee members who have their own businesses.

Conflicts of Interest
In all, 93 percent of Study participants have some form of conflict of interest policy.
Twenty-two percent of respondents apply the policy only to the board; 67 percent to the board
and investment committee; and 72 percent have a conflict of interest policy for their board
and investment committee that also applies to their senior staff.
Forty-six percent of all institutions allow board members to conduct business with the institu-
tion. This is surprisingly high given the recent instances where conflicts of interest in nonprofits
have become headline stories for the media. We assume that there are guidelines in place for
these business relationships, and urge institutions to adopt them if they do not have them.
Forty-six percent of participants report that they do have a policy for resolving potential
conflicts. Twenty-seven percent have a policy of recusal and disclosure, while 4 percent use
recusal only and 14 percent use disclosure only.
FIGURE 6.13
Conflict of Interest Policiess

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Have conflict of interest

policy 93 86 100 94 96 93 87
For board 22 11 2 21 24 28 20
For investment committee 0 0 0 0 0 1 0
For board and investment committee 67 73 98 70 68 60 59
Policy applies to senior staff 72 75 86 79 75 68 59

Allow board members to conduct
business with organization 46 32 55 49 49 49 32
Have process for resolution

of potential conflicts 46 30 57 49 48 49 38
Recusal and disclosure 27 21 36 34 18 27 20
Recusal only 4 4 7 3 4 4 4
Disclosure only 14 4 14 10 24 17 11
Other 6 7 9 7 8 4 5
s
Viewed by size, the four largest cohorts exceed the overall average for having a conflict of
interest policy for board, committee and senior staff but the two smaller cohorts trail the
overall average. Ninety-eight percent of endowments in the $501 million to $1 billion category
have a policy for the board and investment committeethe highest among size cohorts
but only 86 percent apply it to senior staff. Curiously, endowments in this range are also more
likely than their counterparts to allow board members to do business with the institution.
Evidently, this policy does not prohibit the conduct of business, but instead is an instance
of having guidelines in place. That is consistent with the finding that these endowments
practice recusal and disclosure at a higher rate than other size categories.

Across various types of funds, the patterns are reasonably consistent. Public systems are least
likely to allow board members to conduct business with the institution and are considerably
less likely to practice recusal and disclosure than are the other types of funds.
A number of participants have what they call an arms length policy to deal with conflicts
of interest. A Southern foundation said, [The board determines] that a transaction is fair and
in the best interest of the foundation with full disclosure, approval by the board and abstention
by interested directors. A private university in the East says that board members are required
to file an annual conflict of interest statement, while a public foundation in the East says it
follows guidelines issued by the state. A public university in the Midwest says it follows the
universitys blanket conflict of interest policy.
AICPA Guidelines
Investors throughout the nonprofit sector will recall the practice aid released in July 2006
by the American Institute of Certified Public Accountants (AICPA) concerning standards for
confirming the existence and valuation of securities that have been fairly valued. The timing
was especially difficult for educational institutions, most of which had just closed their fiscal
year. But it proved to be a challenge across the sector, as foundations and their auditors
struggled to understand the practice aid and respond effectively. Under tight deadlines, non-
profits had to provide their auditors with substantive audit evidence to support valuations.
For the FY2007 Endowments Study, we inquired about the steps taken to satisfy AICPA
guidelines. Just over half of participants said they increased their due diligence effort,
while surprisingly 21 percent said they took no action. Thirteen percent said they out-
sourced management of alternative strategies. One percent in total and 1 to 3 percent
among endowments with less than $500 million in assets said they discontinued invest-
ment in the affected alternative strategies.
FIGURE 6.14
Steps Taken to Satisfy AICPA Guidelines Concerning

Fair Valuation of Illiquid Holdingss
$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Increased internal due

diligence efforts 52 84 84 76 59 32 15
Discontinued investment in
affected alternative strategies 1 0 0 1 3 1 1
Outsourced management of
alternative strategies 13 2 9 16 17 17 4
Conferred with auditors 4 0 2 6 4 4 3
Other 7 14 14 10 6 5 1
Not familiar with guidelines 8 0 0 4 7 10 18
None 21 2 2 6 14 33 50
s

Of interest are some of the verbatim comments describing this effort on the part
of endowments:
Discontinued managers lacking transparency.

This has motivated a sea change and [we] redirected a significant amount of staff time
to the new requirements.
Developed risk matrix for alternatives and performed additional oversight on riskier funds.
Maintaining more complete files on this issue.
Continuing existing internal control program [and] expanding documentation of reviews
and oversight.
Staff visits with managers separate from the committee.
This year we will likely hire a financial analyst to help us with investments.
We did the AICPA checklist.
We have reduced our exposure to these types of investments.
Asking managers for more transparency. Our auditors are very concerned about
transparency.
This has been a major undertaking of the investment and comptrollers offices over
the past 1.5 years, resulting in a much higher comfort level with [the] current line-up
of investment managers. The initial analysis focused on possible problem investment
managers, some of whom were fired.
Endowments staffing and investment committee size and composition evolved during
FY2007, but did not shift in any major way. The same can be said for policies regarding
conflicts of interest and practices concerning consultant use.
The largest endowments added to staff especially specialists focusing on analysis

and trimmed investment committee size. Smaller endowments continued to rely on staff
generalists who may be required to perform a variety of functions. For these endowments,
a hands-on investment committee may be critical to long-term investment success.
Many of the institutions participating in the 2008 Commonfund Benchmarks Educational

Endowments Report said they have put in place new due diligence, oversight and docu-
mentation practices in response to the new AICPA guidelines. Progress here is encour
aging, but it may take more time before endowments feel that they have mastered these
new requirements.

Appendix I Appendices
About Commonfund Institute

Commonfund Institute was founded to house the education and research activities of
Commonfund and to provide the entire nonprofit community with investment information
and professional development programs. Commonfund Institute is dedicated to the advance-
ment of investment knowledge and the promotion of best practices in financial management
among educational institutions, foundations, operating charities and healthcare organizations.
Commonfund Institute pursues its objectives through a wide variety of resources, including
conferences, seminars and roundtables on topics such as endowment and treasury management;
proprietary and third-party research and publications including the annual Commonfund
Benchmarks Studies, in-depth surveys of nonprofit investment management practices and
policies; the management and distribution of the Higher Education Price Index (HEPI),
an inflation index designed specifically for higher education; Commonfund Forum, the largest
investment conference for trustees and senior executives of qualified nonprofit organizations;
the Endowment Institute, an intensive, week-long seminar for trustees and senior managers of
nonprofit organizations; and the Commonfund Prize for outstanding contribution to non-
profit investment research. The institutes broad range of programs and services is designed
to serve financial practitioners, fiduciaries and scholars.
Commonfund Institute, in addition to conducting and publishing the various Commonfund

Benchmarks Studies, conducts the full range of research, education, publication, professional
development and best practice initiatives in which Commonfund has been engaged since its
founding in 1971. At that time, Commonfund was established with the assistance of a $2.8
million grant from the Ford Foundation; of that total, $500,000 was earmarked specifically
for research and publications. Thus, projects such as this Study have been an essential part of
Commonfunds mission from the beginning. Over the years, we have published numerous
books, white papers and monographs on topics related to endowment and treasury management
in the education and broader nonprofit community.

In addition to the professional staff at Commonfund Institute, this Study is indebted to the
talents and experience of team members at England Associates and Riverside Associates. Both
firms bring a wealth of experience to the research, and add immeasurably to the value created
for our clients. Additionally, we are grateful to the authors of this report professionals from
Commonfund and England Associates, as well as our Advisory Board memberswhose cogent
perspectives and thoughtful analysis make this report a true working reference tool. The 2008
CBS Educational Endowment Study Advisory Board members were David Bahlmann of the
Ball State University Foundation; Lucie Lapovsky of Mercy College; Donald Paukett of SUNY
Foundation at Binghamton; Fred Rogers of Carleton College; Michael Schuller of St. Andrews
School; and Glenn Strehle of Campus Business Advisors.

Appendix II
Type of Fund Tables
F igure 1 . 3 A
Top Decile and Top Quartile Performerss by Size


Number of institutions 767 72 181
Over $1 billion 7 40 23
$501 million$1 billion 6 15 14
$101$500 million 27 24 39
$51$100 million 14 11 13
$10$50 million 32 8 10
Under $10 million 14 2 1
s
F igure 1 . 4 A
Top Decile and Top Quartile Performerss by Type


Number of institutions 767 72 181
Private 48 61 64
Independent 27 19 16
All publics 25 20 20
Public only 8 13 10
SIRF 17 7 10
s

F igure 1 . 6 A / E W
Asset Allocationss for Total, Top Decile and Top Quartile Performers

767 72 181
Asset class
Domestic equities 41 28 32
Fixed income 18 10 12
International equities 16 21 21
Alternative strategies 20 38 32
Short-term securities/cash/other 5 3 3
s
Equal-weighted
F igure 1 . 1 0 A / E W
Alternative Strategies Asset Mixs for Total, Top Decile and Top Quartile Performers

Type of investment
private equity) 11 16 15
event-driven and derivatives) 61 54 57
Venture capital 4 7 6
(non-campus) 11 12 10
(oil, gas, timber, commodities and
managed futures) 9 9 9
Distressed debt 4 2 3
s
Equal-weighted
FIGURE 2.3A
Growth from Investment Returns

Total
Percentage of endowment
growth from investment returns 75.4 77.5 73.8 72.8 82.9 68.3

FIGURE 2.4A
Average One-, Three- and Five-Year Returnss

Total
767 370 209 188 62 126
Average FY2007 total return 16.9 17.6 15.6 16.7 17.4 16.3
Average 3-year return 12.8 13.4 11.8 12.6 13.0 12.4
Average 5-year return 11.5 11.9 10.9 11.3 11.8 11.0
s
Net of fees
FIGURE 2.5A
Long-Term Return Objectives

Total
767 370 209 188 62 126
Have return objectives 65 63 62 70 66 71

Less than 5% 0 0 0 1 2 1
5.05.9% 4 4 6 3 5 2
6.06.9% 4 4 7 2 3 1
7.07.9% 8 7 13 4 6 2
8.08.9% 24 24 20 25 23 26
9.0% and over 25 24 16 35 27 39
Do not have return objectives 35 37 38 30 34 29
Average 8.3 8.4 7.8 8.8 8.7 8.9
FIGURE 2.7A
Asset Allocationss for Fiscal Year 2007

Total
767 370 209 188 62 126
Asset class
Domestic equities 23 21 26 30 30 32
Fixed income 12 11 14 13 13 15
International equities 20 21 19 19 18 19
Alternative strategies 42 46 39 31 32 29
Short-term securities/cash/other 3 1 2 7 7 5
s
Dollar-weighted

FIGURE 2.7A/EW
Asset Allocationss for Fiscal Year 2007 by Size of Fund

$501 $101 $51 $10 Under

767 56 44 210 106 246 105
Asset class
Domestic equities 41 24 30 35 45 46 50
Fixed income 18 11 12 15 17 21 25
International equities 16 22 20 20 17 13 10
Alternative strategies 20 40 34 26 17 13 7
Short-term securities/cash/other 5 3 4 4 4 7 8
s
Equal-weighted
FIGURE 2.8A
Domestic Equity Asset Mixs for Fiscal Year 2007

Total

Active 83 85 89 77 72 83
Indexed (passive/enhanced) 17 15 11 23 28 17
s
Dollar-weighted
FIGURE 2.9A
Fixed Income Asset Mixs for Fiscal Year 2007

Total
Active 73 72 52 83 83 83
Indexed (passive/enhanced) 20 22 45 9 12 5
International bonds 7 6 3 8 5 12
sD
ollar-weighted

FIGURE 2.10A
International Equity Asset Mixs for Fiscal Year 2007

Total
Type of investment
Active MSCI EAFE 69 68 73 70 67 74
Passive/index MSCI EAFE 5 5 4 8 12 2
Emerging markets 26 27 23 22 21 24
s
Dollar-weighted
FIGURE 2.11A
Alternative Strategies Asset Mixs for Fiscal Year 2007

Total
Type of investment
private equity) 19 19 8 20 21 16
event-driven and derivatives) 48 47 41 55 55 52
Venture capital 7 7 2 6 7 5
(non-campus) 14 14 37 8 8 10
and managed futures) 10 11 10 9 8 13
Distressed debt 2 2 2 2 1 4
s
Dollar-weighted

FIGURE 2.11A/EW
Alternative Strategies Asset Mixs for Fiscal Year 2007 by Size of Fund
$501 $101 $51 $10 Under

Type of investment
private equity) 11 19 16 11 8 6 2

event-driven and derivatives) 61 49 54 61 64 69 74
Venture capital 4 7 7 4 3 3 0
(non-campus) 11 13 9 11 13 11 8
and managed futures) 9 10 10 11 10 5 3
Distressed debt 4 2 4 2 2 6 13
s
Equal-weighted
FIGURE 2.12A
Portfolio Rebalancing for Fiscal Year 2007

Total
767 370 209 188 62 126
Rebalanced portfolio 73 76 65 75 77 74
FIGURE 2.13A
Portfolio Rebalancing Frequency for Fiscal Year 2007

Total
Annually 12 10 20 11 13 10
Semi-annually 6 4 9 5 2 6
Quarterly 16 14 20 16 21 13
Monthly 7 8 2 8 4 11
As needed 58 63 48 60 60 60
Other 1 1 1 0 0 0

FIGURE 2.14A
Expected Changess to Asset Allocations

Short-Term
Domestic International Alternative Securities/
Type of Fund Equities Fixed Income Equities Strategies Cash/Other
Increase Decrease Increase Decrease Increase Decrease Increase Decrease Increase Decrease
Total 4 21 6 12 10 7 27 1 1 13
Private 4 22 8 10 11 8 26 1 1 15
Independent 4 16 4 10 9 3 22 2 1 10
All publics 3 26 5 18 9 10 35 1 1 14
Public only 2 27 8 19 8 13 31 2 0 15
SIRF 4 25 4 17 10 8 37 1 2 14
s
FIGURE 2.15A
Use of Marketable Alternative Strategies for Fiscal Year 2007

Total
767 370 209 188 62 126
Use marketable alternative

strategies 58 67 46 55 61 52
FIGURE 2.16A
Marketable Alternative Strategy Allocation for Fiscal Year 2007

Total
Stable, low-volatility/lower
return target 60 55 66 64 64 65
High volatility/higher
return target 22 23 21 20 19 20
Diversified strategy or
fund of funds 12 15 6 11 11 11
Other strategies 6 7 7 5 6 4

FIGURE 2.17A
Performance Expectations for Marketable Alternatives Portfolio

Total
Expectations have been

exceeded 28 29 28 25 26 25
Performed about as expected 56 54 58 58 53 61
Underperformed 6 6 7 5 3 6
No answer/uncertain 10 11 7 12 18 8
FIGURE 2.18A
Satisfaction with Due Diligence/Monitoring of

Total
Very satisfied 19 19 20 21 19 23
Somewhat satisfied 36 35 35 37 34 38
Satisfied 25 27 28 19 29 14
Somewhat unsatisfied 5 6 3 4 5 3
Very unsatisfied 1 0 0 2 0 3
Average 3.8 3.8 3.8 3.9 3.8 4.0
FIGURE 3.2A
Average Annual Spending Rates for Fiscal Year 2007

Total
767 370 209 188 62 126
Average FY2007 spending rate 4.4 4.5 4.1 4.4 4.4 4.4
FIGURE 3.3A
Changes to Spending Rates for Fiscal Year 2007

Total
767 370 209 188 62 126
Increased spending rate 18 17 15 25 22 26

Decreased spending rate 30 39 19 22 31 18
No change 49 42 63 48 37 53

FIGURE 3.4A
Changes to Spending Dollars for Fiscal Year 2007

Total
767 370 209 188 62 126
Increased spending dollars 73 77 66 75 69 78

Average percent increase 18.5 22.9 14.7 13.1 12.8 13.2
Decreased spending dollars 8 9 7 5 5 6
Average percent decrease 13.7 11.3 14.2 21.6 15.3 23.7
No change 15 10 24 14 15 13
FIGURE 3.5A
Spending Policys for Fiscal Year 2007

Total
767 370 209 188 62 126
Spend all current income 2 1 4 3 2 3

Percentage of a moving average 75 77 74 71 77 68
Average percentage 4.8 5.0 4.6 4.6 4.6 4.6
Decide on an appropriate
rate each year 9 5 10 14 10 16
Grow distribution at a
predetermined inflation rate 1 1 0 1 0 1
Spend a pre-specified
percentage of beginning
market rate 5 4 7 6 6 6
Average pre-specified
percentage spent 4.5 4.2 4.6 4.7 5.0 4.6
Last years spending plus
inflation with upper and
lower bands 3 3 3 4 5 4
Weighted average or hybrid
method (Yale/Stanford Rule) 5 6 5 4 2 5
Meet IRS minimum of 5 percent 0 0 0 1 0 2
Other 8 8 9 5 0 7
s


FIGURE 3.6A
Include Future Gifts When Establishing Spending Policy

Total
767 370 209 188 62 126
Yes 8 9 8 8 5 9
No 86 86 87 85 84 86
FIGURE 3.7A
Special Appropriations to Spending in Fiscal Year 2007

Total
767 370 209 188 62 126
Made special appropriations 16 13 19 20 19 21

Percentage above spending rate
represented by special
appropriations 4.9 2.5 3.6 9.8 1.6 15.2
Where special appropriations
were made:s
Capital campaign costs 30 36 28 24 42 15
Annual fund-raising costs 11 6 5 24 42 15
Recover administrative costs 20 11 8 45 58 38
Indirect cost reimbursement 2 2 3 3 0 4
Major campus improvements 28 23 48 13 0 19
Investment management fees 10 9 10 13 8 15
Capital improvements and
maintenance 5 9 3 3 0 4
Debt service 14 11 30 0 0 0
Other 23 21 23 26 8 35
s

FIGURE 3.8A
Importance of Principles Underlying Investment Policy

Scale 15 s
Total
767 370 209 188 62 126
Maximize likelihood of maintain-

ing intergenerational equity 4.3 4.3 4.2 4.6 4.7 4.6
Deliver consistent stream of
income to operating budget 4.0 4.0 4.1 3.8 3.6 3.9
Deliver consistent, as well
as growing, stream of income
to operating budget 4.0 4.1 4.1 3.9 3.6 4.1
Smooth variations in
institutions finance 3.3 3.4 3.3 3.0 2.9 3.1
Remain competitive with
peer institutions 3.4 3.4 3.6 3.2 3.2 3.2
Other 4.6 5.0 4.5 4.8 4.8
s

Average score on a scale of 15 with 5 being high and 1 being low
FIGURE 3.9A
Average Operating Budget for Fiscal Year 2007

Total
Institutions Private Independent All Publics Public Only SIRFs
Average FY2007 operating budget 188.5 173.7 19.3 1,201.8 1,201.8
s

SIRFs do not have operating budgets
FIGURE 3.10A
Changes to Operating Budget for Fiscal Year 2007

Total
Increased budget 92 93 93 83 83
Average percent increase 6.6 6.4 7.1 6.0 6.0
Decreased budget 4 4 3 5 5
Average percent decrease 4.5 4.3 4.5 6.0 6.0
No change 3 2 4 2 2
No answer/uncertain 1 1 0 10 10
s

FIGURE 3.11A
Percent of Operating Budget Funded by Endowment

Total
Percentage of operating
budget funded by endowment 9.0 9.4 9.7 2.0 2.0
Increase 34 37 33 21 21
Decrease 14 13 16 10 10
No change 41 41 42 38 38
No answer/uncertain 11 9 9 31 31
s
FIGURE 3.12A
How Institutions Use the Higher Education Price Index (HEPI)s

Total
767 370 209 188 62 126
Use HEPI 25 33 15 22 27 20
Use for:
Setting spending rate 28 22 22 48 35 56
Budget process 57 62 75 31 35 28
As investment benchmark
or hurdle rate 17 15 13 26 29 24
Setting tuition 3 3 3 2 6 0
Other 12 14 3 14 18 12
s

FIGURE 4.1A
Changes in Gifts and Donations for Fiscal Year 2007

Total
Increase in gifts 50 51 46 51 44 54
Median increase s 40.1 45.2 48.6 26.0 21.0 28.5
Decrease in gifts 27 28 25 30 22 33
Median decrease s 32.0 32.0 31.0 27.8 23.6 30.8
No change 19 17 23 18 29 13
s
Study changed in FY2007 to report median changes

FIGURE 4.2A
Average Total Amount of New Gifts to Endowment for Fiscal Year 2007
Total
Average amount of gifts added

to endowment 8.0 10.5 1.9 10.0 18.8 7.2
FIGURE 4.3A
Percentage of Operating Budget Funded by Annual Giving for Fiscal Year 2007
Total
Average percentage of operating

budget funded by gifts 6.6 5.0 8.5 7.9 1.7 9.7
FIGURE 4.4A
Cost of Development Program, Including Capital Campaign Costs

Dollars ($) in Thousands
Total
Average cost of development

program, including capital
campaign costs 1,924 2,370 810 3,052 6,080 2,523
FIGURE 4.5A
Funding of Development Programss

Total
Operating funds 95 99 98 82 85 82
Unrestricted funds 28 20 22 53 27 60
Endowment management fees 14 4 3 55 46 57
Income and cash balances 14 4 9 45 27 50
on new gifts 8 3 3 25 19 27
Other 2 0 2 8 4 9
s


FIGURE 4.6A
Funding of Capital Campaignss

Total
Operating funds 69 78 54 68 68 68
Unrestricted funds 38 30 45 47 27 53
Endowment management fees 13 4 3 52 55 51
Income and cash balances 12 2 7 45 23 51
on new gifts 10 4 11 23 18 25
Campaign funds raised 6 4 9 5 5 6
Other 5 5 6 5 0 7
s

FIGURE 4.7A
Total
767 370 209 188 62 126
Investment pool amount

includes foundation assets (%) 5 4 2 12 34 1
Has separately administered
foundation (%) 7 5 3 17 52 0
Market value of foundation
investment pool at June 30, 2007
($ in millions) 173.5 103.3 9.7 265.5 273.6 23.5
FIGURE 4.8A
Institutions Reporting Underwater Funds for Fiscal Year 2007

Total
767 370 209 188 62 126
Yes 16 18 11 17 11 21
No 79 75 85 78 81 76

FIGURE 4.9A
Percentage of Endowment Underwater for Fiscal Year 2007

Total
endowment underwater 1.7 1.3 3.3 1.2 0.5 1.4
FIGURE 5.1A
Debt Levels for Fiscal Year 2007

Total
Average debt ($ in millions) 101.4 102.6 17.1 274.1 511.6 30.2

Debt service as a percentage
of operating budget 4.9 4.8 4.8 5.4 3.2 8.4
fixed rate 73 73 72 75 86 65
Average interest rate 4.7 4.7 4.6 4.8 4.7 4.9
floating rate 27 27 28 25 14 35
Average interest rate 4.4 4.4 4.3 4.2 3.9 4.6
FIGURE 5.2A
Changes to Debt in Fiscal Year 2007

Total
Increased debt 29 37 17 27 62 14
Decreased debt 41 47 43 24 25 23
No change 29 15 39 48 13 62
FIGURE 5.3A
Plan to Significantly Increase Debt in Next Two Years

Total
Yes 28 33 24 22 50 12
No 65 60 68 70 40 81

FIGURE 5.4A
Have Formal Debt Policy

Total
Yes 30 34 18 39 55 22
No 65 60 79 60 42 78
FIGURE 5.5A
Use of Interest Rate Swaps to Manage Exposure

Total
Use 45 47 48 32 42 22
Do not use 52 49 50 67 55 78
FIGURE 6.1A
Average Number of Separate Investment Firms Used in Fiscal Year 2007
Total
767 370 209 188 62 126
Average number of firms used 15.4 19.8 7.6 16.0 21.8 13.2
FIGURE 6.2A
Average Number of Managers Used by Asset Class in Fiscal Year 2007

Average Number of Managers Used
Total
767 370 209 188 62 126
Domestic equities 3.8 4.6 2.6 3.7 4.5 3.3

Fixed income 1.9 2.1 1.6 2.1 2.3 2.0
International equities 2.8 3.2 2.0 2.7 3.2 2.4
Alternative strategies (direct) 15.8 17.1 6.8 19.8 24.4 16.2
(fund-of-funds) 3.2 3.2 2.8 3.5 4.2 3.1

FIGURE 6.3A
Direct Investment in Marketable Alternative Investments and Number of

Marketable Alternatives Managers Used in Fiscal Year 2007
Total
allocation placed directly 40 44 36 35 39 33
Average number of separate
managers used 9.4 10.1 4.4 12.7 11.6 13.5
FIGURE 6.4A
Cost of Managing Investment Programs for Fiscal Year 2007
Total
Average cost ($ in thousands) 2,289 3,046 1,298 1,552 2,555 1,051
FIGURE 6.5A
Included in Cost Calucationss

Total
Asset management fees and

mututal fund expenses 94 94 91 94 94 95
Direct expenses 54 60 39 59 77 51
Incentive/performance fees
paid to asset managers 25 28 19 24 28 22
Outsourcing/internal staff
and consultant fees 49 57 34 47 60 40
Other 3 3 2 3 6 1
s
FIGURE 6.6A
Professional Staffing of Investment Function for Fiscal Year 2007
Total
767 370 209 188 62 126
Average number of FTEss 1.4 1.8 0.8 1.5 2.6 0.9
s
Full-time equivalents

FIGURE 6.7A
Composition of Professional Staffs

Total
CFO 68 67 87 49 35 57
Other financial professional 34 35 35 34 39 31
CIO 15 21 2 18 25 14
Portfolio manager 7 8 1 12 12 11
Analyst 16 20 2 24 35 17
Researcher 4 4 0 7 11 4
Other investment professional 3 6 0 1 4 0
Other 8 6 7 13 16 11
s
FIGURE 6.8A
Consultant Uses
Total
767 370 209 188 62 126
Use consultant 61 70 44 61 68 58
Services used ss
Asset allocation/rebalancing 87 88 88 84 83 85
Manager selection 87 87 88 84 88 82
Policy review 78 76 83 80 76 82
Performance attribution and
measurement 87 86 94 83 83 84
Outsourced investment
management 28 28 29 26 19 30
Other 6 5 6 7 10 5

ss468 responding institutions
FIGURE 6.9A
Consultants Conflict of Interest Policy

Total
Consultant has conflict of

interest policy 68 66 73 70 81 64

FIGURE 6.10A
Changes to Staffings in Fiscal Year 2007

Total
767 370 209 188 62 126
Hired in-house
CFO 1 1 1 1 0 2
CIO 1 2 1 1 2 0
Portfolio manager 2 3 0 2 3 2
Analyst 4 5 1 4 6 3
Researcher 0 0 0 1 3 0
Other professional 3 3 3 4 6 3
Increasing use of board/
committee 6 4 9 6 3 8
Outsourcing to consultant 2 2 2 1 3 0
Outsourcing to manager(s) 0 0 0 1 2 1
Fully outsourced investment
functions 1 1 1 1 2 0
Other 2 2 2 3 2 4
None 82 82 83 80 77 82
s
FIGURE 6.11A
Average Number of Voting Members on Investment Committee

Total
767 370 209 188 62 126
Average number of voting

investment committee members 7.6 7.9 7.0 7.9 7.2 8.3
FIGURE 6.12A
Investment Committee Credentials for Fiscal Year 2007
Total
767 370 209 188 62 126

committee members that
are investment professionals 4.3 4.3 4.4 4.3 4.8 4.1
committee members with
alternative strategies experience 3.1 3.4 3.1 2.7 3.0 2.6
Average number of non-trustee
voting members 1.6 1.5 1.7 1.6 2.7 1.1

FIGURE 6.13A
Conflict of Interest Policiess

Total
767 370 209 188 62 126
Have conflict of interest policy 93 95 94 87 77 91

For board 22 23 27 13 10 15
For investment committee 0 0 1 1 0 1
For board and investment committee 67 68 62 69 65 71
Policy applies to senior staff 72 76 67 72 73 71
Allow board members to conduct
business with organization 46 55 42 31 15 40
Have process for resolution
of potential conflicts 46 55 44 32 16 40
Recusal and disclosure 27 31 27 18 8 23
Recusal only 4 5 2 3 2 4
Disclosure only 14 17 13 9 5 11
Other 6 6 6 6 5 7
s
FIGURE 6.14A
Steps Taken to Satisfy AICPA Guidelines Concerning

Fair Valuation of Illiquid Holdingss
Total
767 370 209 188 62 126
Increased internal due

diligence efforts 52 62 36 51 50 51
Discontinued investment in
affected alternative strategies 1 1 1 2 0 2
Outsourced management of
alternative strategies 13 12 15 13 11 14
Conferred with auditors 4 3 6 3 3 3
Other 7 8 6 6 6 6
Not familiar with guidelines 8 5 13 5 6 5
None 21 14 31 25 24 25
s

Appendix III
Participating Educational Endowments
A Bentley College, MA
A.T. Still University of Health Sciences, MO Berea College, KY
Adelphi University, NY Berklee College of Music, MA
Albuquerque Academy, NM Berkshire School, MA
AldersonBroaddus College, WV Berry College, GA
The Altamont School, AL Bethany College, KS
Alverno College, WI Bethel University Foundation, MN
American Baptist Seminary of the West, CA Biola University, CA
American Community School of Beirut, NY Blair Academy, NJ
American University, DC Bloomsburg University Foundation, PA
Amherst College, Trustees of, MA Bluffton College, OH
Arcadia University, PA Boston College, MA
Arch Foundation for the University of Georgia, GA Boston University, MA
Arkansas State University Foundation, AR Bowdoin College, ME
Asbury College, KY Bowling Green State University Foundation, OH
Asbury Theological Seminary, KY Brandeis University, MA
The Asheville School, NC Breck School, MN
Atlanta Speech School, GA Brewster Academy, NH
Augustana College, IL Bridgewater College, VA
Austin College, TX Bridgewater State College Foundation, MA
Austin Peay State University, TN Brimmer and May School, MA
Austin Peay State University Foundation, TN The Brookings Institution, DC
Austin Presbyterian Theological Seminary, TX Brooks School, MA
The Brookwood Community, TX
Brookwood School, MA
B Broome Community College Foundation, NY
Babson College, MA Brophy College Preparatory, AZ
Baker College, MI Brown University, RI
BaldwinWallace College, OH Bryn Mawr College, PA
Ball State University Foundation, IN Buckingham Browne & Nichols School, MA
Bangor Theological Seminary, ME The Buckley School, NY
Bates College, ME Bucknell University, PA
Baylor Oral Health Foundation, TX Buena Vista University, IA
The Baylor School, TN Buffalo State College Foundation, NY
Beaver Country Day School, MA The Bullis School, MD
Belmont Day School, MA The Bush School, WA
Beloit College, WI Butler University, IN

C Choate Rosemary Hall Foundation, CT
Cabrini College, PA Christian Brothers High School, TN
California Institute of Technology, CA Christian Theological Seminary, IN
California Lutheran University, CA City University of New York, Central Office, NY
California Polytechnic State University, San Luis Claremont University Consortium, CA
Obispo Foundation, CA Claremont University Consortium,
The California Province of the Society of Jesus, CA Claremont Graduate University, CA
California State Polytechnic University, Pomona Clark University, MA
Foundation, CA Clarkson University, NY
California State University, CA: The Cleveland Institute of Music, OH
Bakersfield Foundation ColbySawyer College, NH
Fresno Association Colgate University, NY
Fullerton Philanthropic Foundation College of the Holy Cross, MA
Northridge, The University Corporation College of Notre Dame of Maryland, MD
San Bernardino Foundation The College Preparatory School, CA
San Marcos Foundation College of St. Joseph, VT
Calvin College, MI The College of Saint Rose, NY
Canisius College, NY Collegiate School, VA
Capital University, OH Colorado Academy, CO
Capitol College, MD The Colorado College, CO
Capitol Hill Day School, DC Colorado School of Mines Foundation, CO
Cardigan Mountain School, NH Columbus School for Girls, OH
Caritas Labour College, MA Community Day Nursery, NJ
Carleton College, MN Community Music Center, San Francisco, CA
Carnegie Institution of Washington, DC Concordia CollegeNew York, NY
Carnegie Mellon University, PA Concordia University, CA
Case Western Reserve University, OH Connecticut College, CT
The Catholic University of America, DC Convent of the Sacred Heart, NY
Cazenovia College, NY Cornell College, IA
Cedarville University, OH Cornell University, NY
The Center for American and Covenant College, GA
International Law, TX Creighton University, NE
Center for Early Education, CA Crystal Springs Uplands School, CA
Central College, IA Cuesta College Foundation, CA
Central Michigan University, MI The Culinary Institute of America, NY
Central Oregon Community College Foundation, OR Currey Ingram Academy, TN
Centre College of Kentucky, KY Curtis School Foundation, CA
CFS, The Church Farm School, CA Cushing Academy, The Trustees of, MA
Charles Armstrong School, CA
Charles Wright Academy, WA
Charlotte Latin School, NC
Chestnut Hill Academy, PA
Cheverus High School, ME

D F
Daemen College, NY Fairfield University, CT
Dana Hall School, MA Far Brook School, NJ
Darlington School, GA Ferrum College, VA
Dartmouth College, NH Fessenden School, MA
Daytona Beach Community College Fisk University, TN
Foundation, FL Fitchburg State College Foundation, MA
De La Salle Academy, NY Five Colleges, Incorporated, MA
De La Salle Institute, CA Florida A&M University Foundation, FL
Dean College, MA Florida Institute of Technology, FL
Deerfield Academy, MA Florida International University Foundation, FL
Delaware Valley Friends School, PA Foote School Association, CT
Denison University, OH FoothillDe Anza Community Colleges
Denver Seminary, CO Foundation, CA
DePauw University, MO Fordham University, NY
DeSales University, PA The Forman School, CT
Dexter School, MA Foundation for Santa Barbara City College, CA
Dickinson College, PA Foundation for the University of the Virgin
Dixie State College of Utah, UT Islands, VI
Doane College, NE Franciscan University of Steubenville, OH
The Dominican Sisters of San Rafael, CA Franklin W. Olin College of Engineering, MA
Dominican University, IL Franklin Pierce Law Center, NH
Don Bosco Technical Institute, CA French American International School, CA
Dordt College, IA Friends Academy, MA
Drake University, IA Friends Central School Corporation, PA
Drew University, NJ Furman University, SC
Drexel University, PA
Duke University, NC
Dunn School, CA G
Durham Academy, NC GarrettEvangelical Theological Seminary, IL
DYouville College, NY Garrison Forest School, MD
The General Theological Seminary of the
Episcopal Church, NY
E George Mason University Foundation, VA
Earlham College, IN George School, PA
Eastern Illinois University Foundation, IL The George Washington University, DC
Eastside College Preparatory School, CA Georgetown Day School, DC
The Elisabeth Morrow School, NJ Georgetown University, DC
Elmhurst College, IL Germantown Friends School, PA
EmbryRiddle Aeronautical University, FL Gettysburg College, PA
Emma Willard School, NY Gilman School, MD
Emory & Henry College, VA Gladwyne Montessori School, PA
Emory University, GA Golden Gate Baptist Theological Seminary, CA
Empire State College Foundation, NY
Episcopal School of Dallas, TX
The Ethel Walker School, CT

Gonzaga University, WA Hobart and William Smith Colleges, NY
Gordon College, MA Hofstra University, NY
Goshen College, IN Holderness School, NH
Goucher College, MD Holland Hall School, OK
Gould Academy, ME Hollins University, VA
The Governors Academy, MA Holy Child Academy, PA
Graceland University, IA Holy Cross College, IN
Graduate Theological Union, CA Holy Names College, CA
Grand Valley State University, MI Holyoke Community College, MA
Great Basin College Foundation, NV Holyoke Community College Foundation, MA
Great Basin College Foundation, Donald W. Reynolds Hope College, MI
Foundation Maintenance Endowment, NV The Hotchkiss School, CT
Greenhill School, TX Howard University, DC
Greenhills School, MI Huntington College, IN
Greensboro Day School, NC
Greenwich Academy, CT
Groton School, MA I
Grove City College, PA Ignatian Corporation, CA
Guilford College, NC Illinois State University Foundation, IL
Gustavus Adolphus College, MN Illinois Wesleyan University, IL
Indiana State University, IN
Indiana State University Foundation, IN
H Indiana Wesleyan University, IN
Hamden Hall Country Day School, CT Institute of Transpersonal Psychology, CA
Hamilton College, NY Inter American University of Puerto Rico, PR
The Hamlin School, CA International School of the Peninsula, CA
Hamline University, The Trustees of, MN Iowa State University and Foundation, IA
HampdenSydney College, VA Itawanba Community College, MS
Hampshire College, MA Ithaca College, NY
Hanahauoli School, HI
Hanna Boys Center, CA
Harpeth Hall, TN J
Hartford Seminary, CT Jackson State University, MS
Hartwick College, NY Jackson State University Development
Harvard Management Company, MA Foundation, MS
HarvardWestlake School, CA Jacksonville University, FL
Harvey Mudd College, CA Jamestown College, ND
Haverford College, PA Jesuit College Preparatory School of Dallas
Hawaii Preparatory Academy, HI Foundation, TX
Hawken School, OH John Burroughs School, MO
Heidelberg College, OH John Carroll University, OH
Hendrix College, AR Johnson & Wales University, RI
Hesston College, KS Johnson C. Smith University, NC
The Hewitt School, NY Judson University, IL
Highland Community College Foundation, IL
The Hill Center, NC
The Hill School, PA
The Hillside School, PA

K Louisiana State UniversityShreveport Foundation, LA
Kamehameha Schools, HI Louisville Presbyterian Theological Seminary, KY
Kansas State University Foundation, KS Loyola College in Maryland, MD
Kansas University Endowment Association, KS Loyola Marymount University, CA
Kent Place School, NJ Loyola School, NY
Kent School Corporation, CT Loyola University Chicago, IL
Kents Hill School, ME Luther College, IA
Kentucky Community and Technical Luther Seminary, MN
College System, KY Lycoming College, PA
Kenyon College, OH Lynchburg College, VA
Kettering University, MI
The Key School, MD
Kings College, PA M
Knox College, IL Macalester College, MN
Kutztown University Foundation, PA The Madeira School, VA
Kuyper College, MI Madonna University, MI
Marian College, IN
Marlborough School, CA
L Marquette University, WI
La Jolla Country Day School, CA Marshall School, MN
La PietraHawaii School For Girls, HI The Marshall University Foundation, WV
Lake City Community College Foundation, FL Mary Institute and St. Louis Country
Lake Forest Academy, IL Day School, MO
Lake Forest College, IL Marywood University, PA
Lakeside School, WA Massachusetts Institute of Technology, MA
Lamar University, TX Maumee Valley Country Day School, OH
The Lamplighter School, TX McCormick Theological Seminary, IL
Lasell College, MA McDaniel College, MD
Laurel School, OH McDonough School, MD
Lawrence Technological University, MI McLennan Community College Foundation, TX
The Lawrenceville School, NJ McMurry University, TX
Le Moyne College, NY McPherson College, KS
Lebanese American University, NY Medical College of Georgia Foundation, GA
Lebanon Valley College, PA Medical College of Virginia Foundation, VA
Lehigh University, PA Mennonite Education Agency, IN
Lesley University, MA Mercersburg Academy, PA
LeTourneau University, TX Mercy College, NY
Lewis & Clark College, OR Metairie Park Country Day School, LA
LickWilmerding High School, CA Methodist Theological School, OH
Lincoln College, IL Methodist University, NC
Lindenwood University, MO Miami University, OH
Lipscomb University, TN Michigan State University, MI
Loma Linda University, CA Michigan State University Foundation, MI
Longwood University Foundation, VA Michigan Tech Fund, MI
The Loomis Institute, CT Middlebury College, VT
Loras College, IA
Louisiana State University Foundation, LA

Middlesex School, MA Northeastern University, MA
Midland School, CA Northern Illinois University Foundation, IL
Millersville University of Pennsylvania, PA Northfield Mount Hermon School, MA
Millsaps College, MS Northwestern College, IA
Milton Academy, MA Northwestern University, IL
Minnesota Medical Foundation, MN Northwood University, MI
Miss Porters School, CT Norwich University, VT
Mississippi State University Foundation, MS
Mississippi University for Women Foundation, MS
Missouri State University Foundation, MO O
Mitchell College, CT Oakland University Foundation, MI
Monmouth University, NJ Oakton Community College Educational
Monte Cassino School, OK Foundation, IL
Monterey Peninsula College Foundation, CA Oakwood College, AL
The Montessori School, CT Oberlin College, OH
Moody Bible Institute, IL Ohio Northern University, OH
Mooreland Hill School, CT The Ohio State University, OH
Mount Aloysius College, PA Ohio University, OH
Mount Holyoke College, MA Ohio Wesleyan University, OH
Mount St. Marys College, CA Oklahoma Medical Research Foundation, OK
Mount St. Marys University, MD Oklahoma State Regents for Higher
Music Institute of Chicago, IL Education, OK
Oklahoma State University Foundation, OK
Old Dominion University Educational
N Foundation, VA
National University, CA Oldfields School, MD
Nazareth College of Rochester, NY Olivet College, MI
Nevada System of Higher Education, NV Olivet Nazarene University and Foundation, IL
New Canaan Country School, CT The Orchard School Foundation, IN
The New School, NY Oregon Episcopal School, OR
New York Chiropractic College, NY Oregon Health and Science University
The NightingaleBamford School, NY Foundation, OR
Norfolk Academy, VA Oregon University System, OR
Norfolk State University Foundation, VA The Orme School, AZ
North Carolina State University and Otterbein College, OH
Foundations, NC Ouachita Baptist University, AR
North Central Missouri College Foundation, MO
North Dakota State University Development
Foundation, ND P
North Idaho College Foundation, ID Pace University, NY
North Iowa Area Community College Pacific Lutheran Theological Seminary, CA
Foundation, IA Pacific Lutheran University, WA
North Park University, IL Pacific School of Religion, CA
Northampton County Area Community College Pacific University, OR
Foundation, PA The Park School, MA
Northeastern Ohio Universities College of Paul Smiths College of Arts and Sciences, NY
Medicine, OH The Peck School, NJ
The Peddie School, NJ
The Pegasus School, CA

Peirce College, PA Reinhardt College, GA
The Pembroke Hill School, MO Rensselaer Polytechnic Institute, NY
Peninsula School, CA Rhode Island School of Design, RI
The Pennington School, NJ Rider University, NJ
Pennsylvania State University, PA Riverdale Country School, NY
Pepperdine University, CA Rivier College, NH
Phillips Academy, MA Robert Morris University, PA
Phoenix Country Day School, AZ Roberts Wesleyan College, NY
Pine Crest School, FL The Rockefeller University, NY
The Piney Woods School, MS Rohan Woods School, MO
The Pingry School, NJ Rollins College, FL
Pitzer College, CA Rosemont College, PA
Poly Prep Country Day School, NY Rowan University Foundation, NJ
Polytechnic School, CA Rush University Medical Center, IL
Polytechnic University, NY Rust College, MS
Pomfret School, CT Rutgers, The State University of New Jersey, NJ
Pomona College, CA
Portland State University Foundation, OR
The Potomac School, VA S
Poughkeepsie Day School, NY Sacred Heart University, CT
Pratt Institute, NY Sacred Hearts SchoolsAtherton, CA
Presentation College, SD Saginaw Valley State University and
Princeton Day School, NJ Foundation, MI
Princeton Theological Seminary, NJ St. Andrews School, RI
Princeton University, NJ Saint Andrews School of Delaware, DE
The Principia Corporation, MO St. AnnesBelfield School Foundation, VA
Proctor Academy, NH St. Bonaventure University, NY
Providence College, RI St. Edwards University, TX
Providence Day School, NC St. Francis High School, KY
Punahou School, HI St. Georges School, RI
Purdue University, IN St. Gregory College Preparatory School, AZ
Putnam Indian Field School, CT Saint James School, MD
The Putney School, VT St. Johns College, MD
St. Johns College, NM
St. Johns Country Day School, FL
Q St. Johns University, MN
Quinnipiac College, CT St. Johnsbury Academy, VT
Saint Josephs University, PA
St. Lawrence University, NY
R Saint Louis College of Pharmacy, MO
Rabun GapNacoochee School, GA St. Louis Community College Foundation, MO
RandolphMacon College, VA Saint Louis University, MO
Reed College, OR St. Mary of the Woods College, IN
Regent University, VA Saint Marys Hall, TX
Regis University, CO Saint Marys College, IN
Rehoboth Christian School, NM Saint Marys College of California, CA
Saint Michaels College, VT
St. Norbert College, WI
St. Olaf College, MN

St. Paul Academy and Summit School, MN University at Buffalo Foundation
Salisbury School, CT Upstate Medical University
Samford University, AL Stephen F. Austin State University Alumni
San Diego State University Research Foundation, CA Foundation, TX
San Francisco Conservatory of Music, CA Stevens Institute of Technology, NJ
Sandia Preparatory School, NM The Steward School and Foundation, VA
Santa Catalina School, CA Stonehill College, MA
Santa Clara University, CA The Stony Brook School, NY
Sarah Lawrence College, NY The Summit School, NC
Schools of the Sacred Heart, CA Susquehanna University, PA
Scripps College, CA Swarthmore College, PA
Seattle Country Day School, WA Sweet Briar College, VA
Seattle Pacific Foundation, WA
Seattle University, WA
Seton Hall University, NJ T
The Seven Hills School, OH The Taft School, CT
Shippensburg University Foundation, PA Teachers College, Columbia University, NY
Shore Country Day School, MA Temple University, PA
Sidwell Friends School, DC Tennessee State University Foundation, TN
Simmons College, MA Texas A&M Foundation, TX
Skagit Valley College Foundation, WA Texas A&M University System, TX
Skidmore College, NY Texas Lutheran University, TX
Smith College, MA Texas Tech University, TX
Soka University of America, CA Texas Wesleyan University, TX
Sonoma State University Academic The Thacher School, CA
Foundation, CA Thayer Academy, MA
South Dakota State University Foundation, SD Thunderbird, The Garvin School of
Southern California College of Optometry, CA International Management, AZ
Southern College of Optometry, TN Tiffin University, OH
Southern Connecticut State University Tougaloo College, MS
Foundation, CT Trevecca Nazarene University, TN
Southern Methodist University, TX Tri-County Technical College Foundation, SC
Southfield School, MA Trinity Christian College, IL
Spartanburg Methodist College, SC Trinity College, CT
Spelman College, GA Trinity University, TX
Spring Arbor University, MI Tufts University, MA
Spring Hill College, AL
Springfield College, MA
Springside School, PA U
Starr Commonwealth, MI Union College, NY
Starr King School for the Ministry, CA Union Theological Seminary, NY
State University of New York, NY: University of Akron, OH
Binghamton University Foundation University of Akron Foundation, OH
Fredonia College Foundation University of Alabama System,
Geneseo Foundation The Board of Trustees, AL
Oswego College Foundation University of Alaska Foundation, AK
Plattsburgh Foundation The University of Arizona, AZ
Potsdam Foundation
Stony Brook Foundation

The University of Arizona Foundation, AZ University of Puget Sound, WA
University of Arkansas at Fayetteville, AR University of Redlands, CA
University of California, CA: University of Richmond, VA
Berkeley Foundation University of Rochester, NY
Irvine Foundation University of St. Thomas, MN
San Francisco Foundation University of San Diego, CA
University of Chattanooga Foundation, TN University of San Francisco, CA
The University of Chicago, IL University of the Sciences in Philadelphia, PA
University of Cincinnati, OH The University of the South, TN
University of Colorado Foundation, CO University of South Alabama, AL
University of Connecticut Foundation, CT University of South Alabama Foundation, AL
University of Dallas, TX University of Southern California, CA
University of Dayton, OH University of Tennessee, TN
University of Delaware, DE University of Texas Investment Management
University of Denver, CO Company (UTIMCO), TX
University of Evansville, IN University of Tulsa, OK
University of Florida Foundation, FL University of Utah, UT
University of Georgia Foundation, GA University of Vermont and State Agricultural
University of Hartford, CT College, VT
University of Idaho Foundation, ID University of Washington, WA
University of Illinois, IL University of Wisconsin Foundation, WI
University of the Incarnate Word, TX University of Wisconsin, River Falls Foundation, WI
University of Indianapolis, IN University of Wisconsin, Superior
University of Iowa and Foundation, IA Foundation, WI
University of Kentucky, KY University of Wisconsin System, WI
University of La Verne, CA University School, OH
University of Louisville Foundation, KY University School of Milwaukee Fund
University of Maine System, ME Endowment, WI
University of Mary, ND University System of Maryland, MD
University of Maryland College Park University System of New Hampshire, NH
Foundation, MD Ursinus College, PA
University of Massachusetts Dartmouth Ursuline Academy of Dallas, TX
Foundation, MA Ursuline College, OH
University of Michigan, The Regents of, MI
University of Minnesota, MN
University of Minnesota Foundation, MN V
University of Nevada, Reno Foundation, NV Valparaiso University, IN
University of New England, ME Vanderbilt University, TN
University of New Hampshire Foundation, NH The Vanguard School, FL
University of New Mexico and Foundation, NM The Vanguard School, PA
University of North Carolina at Greensboro, NC Vassar College, NY
University of North Dakota Foundation, ND Vaughn College of Aeronautics and
University of North Florida Foundation, FL Technology, NY
University of North Florida Training and Service Vermont Academy, VT
Institute, FL Vermont Law School, VT
University of North Texas, TX Villanova University, PA
University of Northern Iowa Foundation, IA Virginia Commonwealth University, VA
University of Oregon Foundation, OR
University of Pennsylvania, Trustees of, PA

Virginia State University, VA Woodberry Forest School, VA
Virginia State University Foundation, VA The Woods Schools, PA
Virginia Tech Foundation, VA Woodstock Academy, CT
Viterbo University, WI Woodward Academy, GA
The Wright Institute, CA
W
Wabash College, IN X
Wake Forest University, NC Xavier University, OH
Walla Walla College, WA
Washington State University Foundation, WA
The Washington University, MO Y
Wayland Academy, WI Yale University, CT
Wayne State Foundation, NE Yeshiva University, NY
Wayne State University, MI Youngstown State University, OH
Waynflete School, ME
Webb Institute, NY
The Webb School, TN
Weber State University, UT
Webster University, MO
Wellesley College, MA
Wentworth Institute of Technology, MA
West Chester University, PA
West Side Montessori School, NY
West Virginia University Foundation, WV
Western Illinois University Foundation, IL
Western Michigan University, MI
Western New England College, MA
Western Reserve Academy, OH
Western University of Health Sciences, CA
Western Washington University Foundation, WA
Westminster College of Salt Lake City, UT
The Westminster Schools, GA
Westmont College, CA
Westover School, CT
Wheaton College, MA
Whitman College, WA
Whittier College, CA
Whitworth College, WA
Widener University, PA
Willamette University, OR
The Williston Northampton School, MA
Wilmington Friends School, DE
Wisconsin Lutheran College, WI
Wittenberg University, OH

Appendix IV
Glossary of Terms
absolute return Strategies intended to be market neutral alternative strategies A broad classification of invest-
(i.e., not dependent on the overall direction of the markets) ments that includes any investment that is considered less
which include such underlying strategies as: distressed traditional or non-traditional (traditional assets include
debt, merger arbitrage, fixed income arbitrage, convertible stock instruments and debt instruments, such as direct invest-
bond arbitrage and equity market neutral (i.e., offsetting ments or mutual fund investments in equities, bonds, and
long and short positions). money market instruments). Specific examples of alternative
strategies include private equity, venture capital, hedge
active management (see passive investing; passive funds, distressed (or private) debt, and real assets (such
management) The management of a portfolio whose as real estate, oil and natural gas, timber and commodity
investments may be traded at any time. funds). Alternative investments often have a low or negative
correlation to traditional assets, can contribute to lower
active MSCI ex-U.S. (developed) The MSCI World
portfolio risk (as measured by volatility), and can contrib-
ex-U.S. Index is a capitalization-weighted index of equities
ute to a higher expected return.
in the entire developed world other than the United States.
The designation of a country as developed arises primarily arbitrage A financial transaction or strategy that seeks
as a measurement of GDP per capita. There are 22 coun- to profit from a perceived price differential with respect to
tries within this index. Active (long) equity investment related instruments and typically involves the simultane-
strategies in listed stocks of exchanges in developed econo- ous purchase and sale of those instruments.
mies excluding the U.S. Such international investments
typically use the Morgan Stanley Capital International asset allocation Allocating investments among different
World ex-U.S. Index (MSCI World ex-U.S.) or a compa- asset classes (e.g., stocks, bonds, and real estate) to find the
rable index as a benchmark. optimal risk/reward mix. Tactical asset allocation implies
a relatively short-term, and strategic asset allocation a
AICPA guidelines In the summer of 2006, the American longer-term, approach.
Institute of Certified Public Accounts (AICPA) released a
practice aid intended to clarify procedures that institu- asset mix The proportions of a portfolio invested in
tions and their auditors should consider in substantiating various types of investments, such as common stock, bonds,
the existence and valuation of securities that have been guaranteed investment contracts, real estate and cash
fairly valued. These are typically illiquid alternative invest equivalents.
ments such as venture capital, private equity, hedge funds
and other investments that do not trade regularly on the asset-backed security A fixed income instrument
public markets and whose valuations accordingly must comprising collateralized assets that pay interest, such as
be estimated. The AICPA release led to a difficult audit consumer credit cards and automobile loans.
season for many nonprofit institutions in 2006, and it
balanced fund manager (balanced manager) A mutual
continues to be the subject of discussions centering around
fund manager whose investment policy is to balance the
issues such as levels of transparency and valuation processes
funds portfolio by investing in more than one asset class
and controls.
typically stocks, bonds, and cash to obtain a good
return, while minimizing risk.

banded inflation A spending rule pursuant to which collateralized mortgage obligation (CMO)
the annual dollar amount of spending grows by a desig- A structured mortgage bond, backed by a pool of mortgages
nated rate of inflation, subject to upper and lower limits that serves as collateral for the bond, that pays interest and
to the total spending rate expressed in percentage terms. principal in maturity succession. The bond is repaid in
For example, the rule may call for last years spending to series from the mortgage proceeds (i.e., principal payments
be increased by HEPI each year but to be not below go against the Series A bond {lowest interest and maturity}
3 percent nor above 6 percent of assets in any given year. until it is paid off, at which time all payments go against the
next series bond {Series B}). This procedure acts as call
benchmark risk (see risk relative to benchmark) protection against a series bond with a higher interest rate
and a longer maturity, since it cannot be called until the
bond Evidence of a debt on which the issuing company
prior series is paid off.
usually promises to pay holders a specified amount of
interest for a specified length of time and to repay the common stock Securities that represent an ownership
principal on the maturity date. A bond represents debt interest in a corporation. A common stockholder is not a
and its holder is a creditor of the corporation and not a creditor of the corporation, so he or she assumes greater
part owner as is a shareholder. Utility bonds are usually risk than does a creditor but shares in earnings and growth
secured by mortgages. through dividends and price appreciation.
buy-and-hold portfolio A portfolio for which the invest- compliance risk The possibility that existing procedures
ment manager buys securities, usually bonds, with the do not adequately ensure that a fund and its managers
intention of holding them for a long period of time, usu- adhere to the regulations and requirements of governmental
ally until maturity, in contrast with an actively managed and regulatory bodies and industry standards of practice
portfolio. The term may also apply to common stocks such or that the recordkeeping of compliance documentation is
as those held by an index fund. not sufficient to show that the fund and its managers have
been in compliance with those standards.
capital gain Profit on the sale of an investment, which
may include common stock, corporate and government convertible arbitrage A strategy that seeks to take
bonds, real estate and other real assets. There are long- advantage of the pricing inefficiencies of the embedded
and short-term capital gains, as defined in the Internal option in a convertible bond. It is generally characterized
Revenue Code. Capital losses may also occur. by a long convertible position and corresponding short
position in the underlying stock. Convertible arbitrage
capital markets Markets in which capital funds (debt
may also use leverage.
and equity) are issued and traded. Included are private
placement sources of debt and equity, as well as organized convertible bond A bond or preferred stock that can be
markets and exchanges. turned into common stock at a predetermined conversion
rate, frequently at predetermined times. Conversion is
cash and cash equivalents Assets with maturities of
often forced by the issuer by calling the bond or preferred
less than one year (e.g., Treasury bills, commercial paper,
stock prior to its maturity.
certificates of deposit and nonconvertible bonds) which
are highly liquid and comparatively risk-free. core portfolio A portfolio, closely resembling the struc-
ture and risk of the total market, that can be actively or
cash management Bank services designed to help a
passively managed.
company manage its cash more efficiently. These services
include payable-through drafts, zero-balance accounts, corporate bond A fixed income security issued by a
remote disbursement accounts, account reconciliation, corporation to evidence borrowing, usually with a term
lockboxes, depository transfer checks, freight payment in excess of five years.
plans, wire transfers, concentration accounts, information
reporting and cash management consulting. counterparty A principal to a foreign exchange, swap, or
other derivative instrument, as opposed to an agent such
as a broker.

credit/counterparty risk (see financial risk) The poten- emerging growth stock (see emerging growth fund)
tial that the issuer of a security may default or fail to honor The stock of a relatively small company that is growing
their financial obligations to the fund or its client. The very rapidly but is not large enough or has not been in
risk that a counterparty (or participant in a securities trans- business long enough to be of investment quality.
action) does not meet its financial obligation, thereby
resulting in a financial loss for the transaction. emerging markets fund (see emerging growth fund)
A fund that consists of investments in markets of emerging
debt fund (see fixed income portfolio) A portfolio countries, such as some of those in Southeast Asia and
of debt-oriented investments (e.g., real estate mortgages) Central and South America.
or fixed income securities (e.g., corporate bonds).
endowment (see quasi-endowment, term endowment,
dedicated bond portfolio A portfolio of debt-oriented true endowment) The permanent funds of a nonprofit
securities that is structured to meet a specific liability such institution, consisting of cash, securities or property. Income
as the payment of benefits to a group of retirees for the from endowment is used to help finance the ongoing
remainder of their life. The portfolio is dedicated to the operations of the institution. True endowment is that
objective of meeting the identified liability. portion of the funds that are commonly restricted as to
use of principal and/or income. Not all endowments are
default risk (see credit/counterparty risk; financial risk) true endowments, as some may be funds functioning as
endowment by vote of the governing board.
derivative A financial instrument whose value depends
upon the value of another instrument or asset (typically an equity, equities (stock) 1) The total ownership interest
index, bond, equity, currency or commodity). Examples in a company of all common and preferred stockholders.
are futures, forwards and options. 2) Ownership interests in companies, often producing
current income paid in the form of quarterly dividends,
distressed debt (see event driven strategy) Publicly
that can be traded in public equity markets. As an asset
held and traded debt and equity securities, as well as bank
class, may include convertible bonds (if held as an oppor-
loans, of companies and governments that are in financial
tunistic means of eventually acquiring a companys stock)
distress. Financial distress is indicated by having filed or
and warrants, rights, options and futures (if the under-
being near to filing for protection under Chapter 11 of
lying assets are equities).
the U.S. Bankruptcy Code. Distressed public debt and
related bank loans trade at risk premiums generally in equity derivative Any financial instrument, such as
excess of 10 percentage points to U.S. Treasury securities options or futures, priced off of individual stocks or groups
of comparable duration. of stocks.
dollar-weighted return Also called the internal rate of equity market neutral A strategy designed to exploit
return (IRR); the interest rate that makes the present value equity price inefficiencies. It typically involves using
of the cash flows from all the subperiods in an evaluation balanced long and short positions in equity markets to
period plus the terminal market value of the portfolio equal insulate the portfolio from overall market risk. Equity
to the initial market value of the portfolio. market portfolios are often designed to be neutral relative
to beta, sector, industry, market capitalization, and
EAFE The Europe, Australia, and Far East Index from
style, among other factors. Leverage may be applied
Morgan Stanley Capital International. An unmanaged,
to enhance returns.
market-value weighted index designed to measure the
overall condition of overseas markets. equity portfolio A portfolio of equity-oriented securities
such as common stock or equity real estate.
emerging growth fund (see emerging growth stock;
emerging markets fund) A fund that consists of the equity real estate The ownership interest possessed by
stocks of emerging growth companies, typically higher risk shareholders in a real estate investment.
stocks in defined market segments such as high tech and
medical technology.

event driven strategy Seeks to take advantage of antici- global macro A global, top-down approach to investing
pated corporate events and to capture price movement in which managers will take long or short positions in fixed
generated by these events. Two of the better known event income, equity, currency and commodity markets.
driven strategies are merger arbitrage and distressed debt.
global portfolio (see international portfolio)
fiduciary A person, committee or institution that holds An investment portfolio (of equities or bonds) that can
assets in trust for another. The property may be used or invest in U.S. and non-U.S. markets.
invested for the benefit of the owner, depending on
the agreement. government bond A security issued by a federal, state,
or city government to evidence borrowing, with a term
fiduciary risk The potential exposure of fiduciaries to usually in excess of 10 years.
legal and regulatory actions precipitated by a breakdown
in controls, or the failure to execute due diligence on growth stock Stock in a company that has shown
behalf of the beneficiaries. better-than-average growth in earnings and is expected

to continue to do so. It can pay little or no dividends
financial risk (see credit/counterparty risk) but is expected to have growth potential over an extended
The possibility that a bond issuer will default, i.e., fail period of time.
to repay principal and interest in a timely manner.
Also called default risk. hedge fund (see marketable alternative strategies
[hedge funds])
fiscal year (FY) Accounting period covering 12 consecu-
tive months, 52 consecutive weeks, 13 four-week periods, HEPI The Higher Education Price Index, which reports
or 365 consecutive days at the end of which the books are price information for the goods and services purchased
closed and profit and loss are determined. An institutions by colleges and universities for their current operations.
fiscal year is often, but not necessarily the same as the Colleges and universities use these measures to analyze
calendar year. the impact of inflation on their operations as a starting
point for securing additional revenues to meet expected
fixed income arbitrage A strategy to capture the dis higher costs, so as to preserve their purchasing power.
parities of pricing across the global fixed income markets
and related derivatives. Some of the more common fixed high yield bond (junk bond) A lower-quality rated bond,
income arbitrage strategies find opportunity in yield rated BB or lower by Standard & Poors and Ba or lower
curve anomalies, volatility differences and bond futures by Moodys, is called high yield because the interest rate is
versus the underlying bonds. Leverage is often used to higher than average to compensate investors for taking
enhance returns. higher-than-average risk.
fixed income portfolio A portfolio of fixed income secu- income stabilization reserve A percentage of the total
rities, such as marketable bonds, private placements, real withdrawal set aside in a separate fund to be used to augment
estate mortgages and guaranteed investment contracts. spending in a down year. Employed as a smoothing device
to lessen any decrease in the transfer to operating budget
foundation An entity which exists to support a charitable in a given year.
institution and which is funded by an endowment or
donations. index fund (see international index fund) A portfolio of
stocks structured to replicate the performance of a commonly
fund of funds An approach to investing in which a used index, such as the S&P 500.
manager invests in various funds formed by other invest-
ment managers. The benefits of this approach include indexing (see passive investing; passive manage-
diversification, the expertise of the fund-of-funds manager, ment) A passive investment strategy in which a portfolio
access to hedge fund managers who may be otherwise is designed to mirror the performance of a stock index,
unavailable and a less intense commitment of staff such as the S&P 500. Also, tying taxes, wages or other
resources by the investor. measures to an index.

international index fund (see index fund) A portfolio market risk The possibility of loss due to large move-
of stocks structured to replicate an index of international ments in market prices (e.g., due to changes in interest
securities such as the MSCI World ex-U.S. Index or rates, foreign exchange rates, volatility, correlation
MSCI EAFE Index. between markets, capital flows).
international portfolio (see global portfolio) marketable alternative strategies (hedge funds)
An investment portfolio (of equities or bonds) that can A fund, usually a limited partnership, used by wealthy
invest only in non-U.S. markets. individuals and institutions. Hedge funds are allowed to
use aggressive strategies including selling short, leverage,
investment return The total amount that an investor or program trading, swaps, arbitrage and derivatives. Since
an investment fund earns from its investments, including most are restricted by law to less than 100 investors, the
both realized and unrealized capital gains (appreciation/ minimum investment is typically $1 million. The general
depreciation) and income (dividends and interest). partner usually receives performance-based compensation
and invests significantly in the partnership.
junk bond (see high yield bond)
marketable securities Publicly traded securities, such

large cap fund A fund that invests in stocks with larger
as stocks, bonds or notes, which, as such, are easily bought
market capitalizations, generally $5 billion or more.
and sold in the marketplace and readily convertible
lehman aggregate bond index An index that covers the to cash.
U.S. investment-grade, fixed-rate bond market with index
merger arbitrage (see event driven strategy) Long and
components for government, corporate, mortgage pass-
short positions are held in both companies that are involved
through and asset-backed securities.
in a merger or acquisition. Merger arbitrageurs are typi-
liquidity risk Covers the failure to maintain sufficient cally long the stock of the company being acquired and
funds (cash and marketable securities) to meet short-term short the stock of the acquirer. The principal risk of this
obligations. Also, market liquidity risk is the difficulty in strategy is deal risk.
liquidating certain investments due to the lack of active
mid-cap fund A fund that specializes in stocks with
markets in these securities.
market capitalizations generally in the range of $2 billion
long/short equity Long/short equity funds take long to $10 billion.
and short positions in listed equities generally with a
modeling risk The potential for loss due to actions taken
net long position. Managers seek to find (buy) stocks
or to policies implemented based on views of the world,
which are undervalued by the market and short stocks
in general, and the investment community, in particular,
whose prices are overvalued by the market.
that are derived from improper models. These views are
macro Macro managers use long and short strategies derived from representation(s) of reality that do not capture
based on their view of the overall market direction as all significantly relevant information or are inappropriately
influenced by major global economic trends and events. applied throughout the investment program.
Investments can include stocks, bonds, currencies, and
money market fund (MMF) A fund managed by an
commodities in the form of cash or derivatives instruments
investment banking firm, investment manager, or insurance
of both developed and emerging economies. Macro
company, in which short-term funds of individuals, insti-
strategies often use moderate amounts of leverage.
tutions, and corporations may be invested. These funds are
manager, investment manager A firm, committee or invested in money market instruments.
individual, inside or outside an institution responsible for
money market instrument A short-term debt security,
making decisions to buy, hold or sell assets. May also be
including Treasury bills, bank CDs, commercial paper,
called a money manager or investment adviser.
Eurodollar CDs, and Yankee CDs, among others. Money
market instruments have maturities of a year or less.

mortgage-backed security A security for which inves- performance measurement Various techniques for
tors receive payments out of the interest and principal on measuring the total rate of return (income received plus or
the underlying mortgage. minus changes in market value between two dates) of a
pension or profit-sharing plan and of investment managers,
multi-strategy fund A fund providing exposure, in a generally in comparison with other plans and managers
single investment, to several investment styles and strategies having similar investment objectives.
in addition to a disciplined asset allocation process and
ongoing rebalancing. A multi-strategy fund seeks to add policy portfolio A portfolio of investment assets
alpha over a full market cycle, while providing significant designed to achieve the financial and investment objectives
risk reduction through diversification of manager and of an institution over the long term. Policy portfolios are
investment styles. typically established by an investment committee which
sets target percentages for each asset class and strategy
mutual fund An investment company or trust in which selected for inclusion.
a number of investors pool their funds and receive units in
the fund that are priced daily. There are many types of portable alpha The inclusion of a non-correlated
mutual funds: stock funds, bond funds, money market strategy (i.e., one whose returns are independent of market
funds, and closed- and open-end investment funds. Partici- performance) within an existing portfolio in order to
pants in these funds also cover a wide range of investors improve risk-adjusted returns. The word portable is used
(e.g., individuals, pension funds, and trust funds). because the strategy can be applied without affecting the
style under which a particular portfolio is being managed.
operational risk The potential for discontinuity due to
the possibility of a breakdown in operational procedures portfolio Combined holdings of multiple stocks, bonds,
particularly as they relate to a process breakdown; this is commodities, real estate investments, cash equivalents or
distinct from the design, implementation, and maintenance other assets by an individual or institutional investor. The
of computerized information systems, e.g., errors resulting purpose of a portfolio is to reduce risk by diversification.
from a lack of reviewer function to catch errors, from incor-
rect data and/or lack of adequate staffing/backup. portfolio diagnostics An analytical performance measure-
ment approach that segregates a managers investment
passive account An account of stocks and/or bonds that performance into components such as value added from
is not actively managed. securities selection and value added from market timing.
passive/index MSCI ex-U.S. (developed) portfolio optimization A process whereby an investors

Equity investment strategies in the Morgan Stanley Capital bond portfolio is restructured to match anticipated cash
International World ex-U.S. Index (MSCI World ex-U.S.) inflow and outflow. Some reinvestment of early cash receipts
or a comparable index. The MSCI World ex-U.S. Index is is allowed.
a capitalization-weighted index of equities in the entire
developed world other than the United States. The desig- portfolio restructuring The rebalancing of a large vol-
nation of a country as developed arises primarily as a ume of equity in a portfolio at one time by selling baskets
measurement of GDP per capita. There are 22 countries of stock and reinvesting the proceeds in other equity,
within this index. debt, or cash securities.
passive investing (see active management; indexing; preferred stock A class of favored stock whose holders
passive management) A process that creates a portfolio have a claim on the companys earnings before payment can
of stock or bonds, not actively traded, that will replicate be made to common stockholders. Preferred stockholders
as closely as possible the performance of standard market are usually entitled to dividends at a specified rate, when
indices such as the S&P 500 for stock or the Lehman declared by the board of directors, before payment is
Brothers corporate and government index for bonds. made to common stockholders, and they usually have
priority if the company is liquidated; however, preferred
passive management (see active management; stockholders generally do not have voting rights.
indexing; passive investing) Assets that are not traded
actively but set up and held in an index fund.

price/earnings ratio (P/E) The price/earnings ratio of and shareholders, nonprofits are frequently confronted
a stock is calculated by dividing the current price of the stock with the issue of whether they should vote their shares as
by its trailing 12 months earnings per share. The P/E recommended by the companys management or analyze
ratio relates the price of the stock to the per-share earnings each issue in light of the institutions mission. Some non-
of the company. High P/E generally indicates that the profits have adopted policies by which they either (i) vote
market is paying more to obtain the stock because it has their own proxies, (ii) assign the responsibility to a third
confidence in the companys ability to increase its earn- party or (iii) have their investment managers vote the
ings. Conversely, a low P/E often indicates that the mar- proxies, usually in accord with guidelines provided by
ket has less confidence that the companys earnings will the institution.
increase rapidly or steadily, and therefore will not pay as
much for its stock. In most cases, a fund with a high quantitative portfolio A portfolio management approach
average P/E ratio has paid a premium for stocks that have using computer-based models or other quantitative methods
a high potential for increased earnings. If the funds aver- to select securities and/or structure a portfolio.
age P/E is low, the manager may believe that the stocks
quasi-endowment (see endowment, term endow-
have an overlooked or undervalued potential for appre
ment, true endowment) Endowment that is composed
ciation. A P/E ratio calculated using a forecast of future
of unrestricted funds functioning as endowment by the
earnings is called a forward P/E.
vote of the Board of Trustees. These funds are distinct from
private equity Equity capital invested in a private the operating cash and reserves of the institutions, which
company. has the effect of sheltering them from ad hoc spending.
Nevertheless, these funds can be spent, by vote of the Board,
private placement A distribution of securities (including for any purpose.
interests in commingled funds) made in a private manner
and only to qualified investors. A private placement does request for proposal (RFP) The practice of institutional
not require registration with the SEC and is not offered funds that seek to allocate funds to a specific investment
to the public. style by requesting competing investment management firms
and trust and custody banks to submit proposals detailing
proxy voting disclosure In an effort to improve the capabilities, prices and the like.
transparency of proxy voting by mutual funds and other
registered investment vehicles, the SEC now requires restricted funds Designated by a donor or board of
registered investment management companies to provide trustees for a specific purpose, and cannot be used for any
disclosure about how they vote proxies relating to port other purpose.
folio securities they hold. These amendments require
return (average, annual, total) Total return measures
registered investment management companies to disclose
the annual return on an investment including the apprecia-
the policies and procedures that they use to determine
tion and dividends or interest. Total returns are calculated
how to vote proxies relating to portfolio securities. The
by taking the change in investment value, assuming the
amendments also require registered investment management
reinvestment of all income and capital gains distributions
companies to file with the Commission and to make
(plus any other miscellaneous distributions) during the
available to shareholders the specific proxy votes that they
period, and dividing by the initial investment value. These
cast in shareholder meetings of issuers of portfolio secu
returns are not adjusted for sales charges, but they are
rities. The intent of the rule is to encourage funds to become
adjusted for management, administrative and other costs
more engaged in corporate governance of issuers held in
that are automatically deducted from fund assets.
their portfolio.
risk management The procedures necessary to manage
proxy voting policy A proxy statement is a document
exposure to various types of risk associated with transacting
that provides shareholders with information about issues to
business or investments.
be discussed and voted upon at a stockholders meeting.
Shareholders may attend the meeting and register their votes
in person or vote by sending in proxy ballots on the various
matters scheduled to come before the meeting. As investors

risk relative to benchmark (benchmark risk) systems risk The risk that current system designs or
The potential for losses due to unintended bets or a break- implementations are inappropriate or ineffective to the extent
down in due diligence; the impact of investment initiatives that information obtained from or disseminated through
that were not fully understood at the outset and had the the system environment is incorrect or incorrectly perceived,
potential of unintended consequences; or the monetary and the decisions made based on that information are
impact (to the portfolio and the fund) of managers who sub-optimal. In addition, this includes the security of infor-
violate guidelines, engage in unauthorized transactions, mation in response to unauthorized access and disaster.
develop excessive concentrations (high trading error),
commit fraud, etc. taxing of gifts The process by which all new gifts are
assessed their proportionate share of the cost of managing
S&P Standard & Poors Corporation the total endowment pool.
S&P 500 A popular stock market index composed of technical analysis Research to identify mispriced
500 stocks selected by Standard & Poors Corporation securities that focuses on recurrent and predictable stock
to represent the entire market and used by many funds to price patterns and on proxies for buy or sell pressure in
compare the investment performance of their equity- the market.
oriented managers.
term endowment (see endowment, quasi-endowment,
small cap fund A fund that specializes in stocks with true endowment) Endowment that is restricted for a
lower market capitalization; small cap stocks are usually period of time, after which any remaining unused funds
$2 billion or less in market capitalization. may become unrestricted (or quasi-endowment).
socially responsible investing A practice wherein inves- true endowment (permanent endowment)
tors screen or restrict certain investments based on social, (see endowment, quasi-endowment, term endowment)
environmental or political criteria. Restrictions can vary Endowment made up of funds that are restricted (usually
broadly depending on the investors philosophy and may by donor mandate) as to the use of principal or income,
include restrictions based on issues of human rights, or both. Funds dedicated to scholarships or faculty support
environmental impact, gambling, firearms, tobacco, etc. are the most common types of restricted endowments.
spending policy or rule The guideline established UMIFA First promulgated in 1972, the Uniform
by the board which determines the amount of the annual Management of Institutional Funds Act (UMIFA), governs
transfer of monies from the investable assets to the oper endowment spending by charitable corporations and by
ating budget. Examples include: a) spend all income; some charitable trusts. All states except Alaska, Pennsylva-
b) spend 5 percent of a three-year moving average market nia and South Dakota have enacted some form of this
value; c) increase spending by inflation each year. law, although there are key differences from state to state.
The law freed charity managers to delegate investment
spending rate The amount of spending specified by decisions to outside managers, to invest assets for long-
the board from the investable assets, usually expressed as term growth, not just current yields, and to invest in
an annual percentage of the beginning market value of accordance with strategies that balance risk and return.
the fund. It is currently proposed that this law be replaced by the
newly drafted Uniform Prudent Management of Institu-
stock (see equity)
tional Funds Act (UPMIFA).
sustainability Institutional policies and practices that
underwater fund An individual true or restricted fund
attempt to meet the material needs of present generations
that has a market value that has decreased below its historic
of users, without compromising the ability of future
dollar value as defined by the Uniform Management of
generations to enjoy a similar standard.
Institutional Funds Act (UMIFA). Historic dollar value is
the aggregate fair value in dollars of (i) an endowment
fund at the time established, (ii) subsequent contributions
to the fund, and (iii) other additions to the fund required
by the donor or law.

unit (see unitized accounting) A division of quantity further by means of specific guidelines for fiduciaries.
accepted as a standard measurement of exchange. For It applies the rule of prudence to charitable spending,
example, in the commodities markets a unit of wheat is eliminating outmoded concepts such as historic dollar
a bushel; the unit of U.S. currency is the dollar. value while providing an optional section to restrain
levels of spending that are deemed imprudently high.
unitized accounting A method of managing an invest- Finally, it facilitates the release or modification of
ment pool whereby the pool is divided into units which restrictions on a fund, consistent with the recognition
are assigned an arbitrary value (e.g., $10 per unit) at a and protection of donor intent. Taken as a whole,
particular point in time. Thereafter, each unit fluctuates in UPMIFA establishes a stronger and more unified basis
value according to the performance of the fund and the for charitable fund management.
aggregate value of all the units is equal to the funds current
market value. Any new additions to or distributions from value stock A stock that is considered to be a good stock
the fund are made in units and are assigned a value derived at a great price, based on its fundamentals, as opposed to
by dividing the total market value of the fund by the a great stock at a good price. Generally, these stocks are
number of units. contrasted with growth stocks that trade at high multiples
to earnings and cash.
unrestricted funds Monies with no requirements or
restrictions as to their use or disposition. venture capital Funds invested in a high-risk enterprise
that is not large or mature enough for its shares to be
UPMIFA (Uniform Prudent Management of Institutional publicly traded.
Funds Act) This new uniform law, which was approved
by the National Conference of Commissioners on Uniform yield The return on a security or portfolio, in the form
State Laws in 2006 and has now been sent to state legisla- of cash payments. Most yield comes from dividends on
tures for approval, clarifies previously existing standards for equities, coupons on bonds, or interest on mortgages.
the investment and expenditure of all types of charitable In general, yield is defined in terms of the component of
endowment funds. UPMIFA is designed to replace the exist- return that is taxable as ordinary income. Consequently,
ing Uniform Management of Institutional Funds Act since the capital gain on a Treasury bill or other discount
(UMIFA), which dates from 1972. UMIFA was a pioneering note is viewed for tax purposes as a form of interest, it
statute, providing uniform and fundamental rules for the is also included in the definition of yield. Yield is usually
investment of funds held by charitable institutions and the described in percent terms (e.g., 7 percent per annum).
expenditure of funds donated as endowments to those
institutions. Those rules supported two general principles: yield spread analysis The comparison of yield differ
1) that assets would be invested prudently in diversified ential among varying types of fixed income securities.
investments that sought growth as well as income, and Professional investors watch for changes in normal yield
2) that appreciation of assets could prudently be spent for spreads among many types of issues to identify overpriced
the purposes of any endowment fund held by a charitable situations (where they might sell securities they own) and
institution. UPMIFA continues to follow these principles, underpriced securities (where they might buy).
while clarifying previously existing standards for the
yield-to-maturity The rate of return on a bond until
investment and expenditure of all types of charitable
its due date, including both interest payments and price
endowment funds. UMIFA in its original form excluded all
changes. It is greater than the current yield when the
trusts, a gap which led to the passage of the subsequent
bond is selling at a discount and less than the current yield
Uniform Prudent Investor Act and Uniform Principal and
when the bond is selling at a premium.
Income Act in most states. UPMIFA is intended to elimi-
nate the need for multiple statutes by applying consistent
investment and spending standards to all forms of charitable
funds, whether held by institutions that are incorporated,
unincorporated or organized as charitable trusts (i.e., trusts
with a beneficial purpose but no named beneficiaries).
It strengthens the concept of prudent investing, refining it

Design: Frank C. Lionetti Design Production: Mansfield Communications
15 Old Danbury Road Tel 888-TCF-MAIN
P.O. Box 812 Tel 203-563-5000
Wilton, CT 06897-0812 www.commonfund.org

Commonfund Benchmark Studies 2008

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Commonfund Benchmarks Study

Educational Endowment Report

The investment performance generated by the largest endowmentsthe 100 participants

Chapter 1 The Commonfund Benchmarks Study

Chapter 2 Returns and Asset Allocation 20

Chapter 6 Resources, Management and Governance 69

Domestic Equity Asset Mix for Fiscal Year 2007

$501 $101 $51 $10 Under

Domestic Equity Asset Mix for Fiscal Year 2007

 Commonfund Benchmarks Study 2008 Educational Endowments

Participating institutions were interviewed by telephone, a research technique that assures

Commonfund Institute prepares a number of companion Benchmarks Studies. Our Canadian

Commonfund Benchmarks Study 2008 Educational Endowments 

Why do the bases (or number of respondents) change between Figures?

Are all the data reported as averages?

 Commonfund Benchmarks Study 2008 Educational Endowments

England Associates, Inc.

Riverside Associates, Inc., The Markets Group

This positive investment environment enabled participating institutions to continue

10 Commonfund Benchmarks Study 2008 Educational Endowments

Commonfund Benchmarks Institutions by Size

Commonfund Benchmarks Study 2008 Educational Endowments 11

Commonfund Benchmarks Institutions by Types

12 Commonfund Benchmarks Study 2008 Educational Endowments

Top Decile and Top Quartile Performerss by Size

Total Institutions Top Decile Top Quartile

Top Decile and Top Quartile Performerss by Type

Total Institutions Top Decile Top Quartile

Commonfund Benchmarks Study 2008 Educational Endowments 13

Total Institutions Top Decile Top Quartile

14 Commonfund Benchmarks Study 2008 Educational Endowments

Total Institutions Top Decile Top Quartile

Commonfund Benchmarks Study 2008 Educational Endowments 15

Numbers in Percent (%)

Total Institutions Top Decile Top Quartile

Total Institutions Top Decile Top Quartile

16 Commonfund Benchmarks Study 2008 Educational Endowments

Total Institutions Top Decile Top Quartile

Total Institutions Top Decile Top Quartile

Active management is by far the preferred approach to international equity investing.

Commonfund Benchmarks Study 2008 Educational Endowments 17

Total Institutions Top Decile Top Quartile

18 Commonfund Benchmarks Study 2008 Educational Endowments

Commonfund Benchmarks Study 2008 Educational Endowments 19

20 Commonfund Benchmarks Study 2008 Educational Endowments

Average Annual Total Returns for Total Institutions

-10 2000 2001 2002 2003 2004 2005 2006 2007

Commonfund Benchmarks Study 2008 Educational Endowments 21

Average Return by Asset Class for Fiscal Year 2007

22 Commonfund Benchmarks Study 2008 Educational Endowments

Growth from Investment Returnss

0 Total Over $501 $101 $51 $10 Under

s590 responding institutions

Commonfund Benchmarks Study 2008 Educational Endowments 23

Average One-, Three- and Five-Year Returnss

0 Total Over $501 $101 $51 $10 Under

FY2007 total return

24 Commonfund Benchmarks Study 2008 Educational Endowments

Long-Term Return Objectives

$501 $101 $51 $10 Under

Have return objectives 65 62 73 71 60 68 47

Commonfund Benchmarks Study 2008 Educational Endowments 25

Asset Allocationss for Total Institutions

0 2000 2001 2002 2003 2004 2005 2006 2007

Commonfund Benchmarks Study 2008 Educational Endowments

Commonfund Benchmarks Study 2008 Educational Endowments

Commonfund Benchmarks Study 2008 Educational Endowments

Asset Allocation, Risk and Liquidity in Perpetual Portfolios