The Markets November 7, 2011

Endowments Improving, Though not Fully Recovered

Higher education endowments earned returns averaging 19.8% in fiscal year 2011. 
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The preliminary data gathered from 284 U.S. colleges and universities indicate these institutions’ endowments returned an average of 19.8% for the 2011 fiscal year.

The 2011 NACUBO-Commonfund Study of Endowments was sponsored by the Commonfund Institute and the National Association of College and University Business Officers (NACUBO). The study found the highest return earned for the FY2001 was 31.8% and the lowest was 3.7%.  

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The FY2011 effective spending rate for the group averaged 4.3%, but for the two largest endowment cohorts with assets over $500 million the effective spending rates were 5.1% and 5%, respectively.  

“What stands out in these preliminary figures is the fact that, despite the positive returns of this year and last, endowments still have not completely recovered from the damage inflicted by the market declines that accompanied the 2008-09credit crisis,”  NACUBO President and Chief Executive Officer John D. Walda and Commonfund Institute Executive Director John S. Griswold said in a joint statement.  

In the past, larger endowments have tended to significantly outperform smaller ones. This year's sample, however, reveals a very tight spread, as institutions with assets over $1 billion returned 20.2% on average, while those with assets below $25 million reported an average return of 19.1%. Mid-range endowments-those with assets between $101 and $500 million-reported an average return of 19.9%. The lowest average return-18.9%-came from endowments with assets between $25 and $50 million. The highest average return—20.3%—was reported by endowments with assets between $51 and $100 million.

While average returns were quite similar across size groups, the way they were earned varied widely. For example, institutions with assets over $1 billion reported allocations to domestic equities that averaged just 12%. At the opposite end of the size spectrum, endowments with assets below $25 million reported a 41% allocation.

Similarly, the two largest size cohorts reported average fixed income allocations of 10% or less, while the three smaller size cohorts all had average fixed income allocations in excess of 20%. Major differences emerged once again in allocations to alternative strategies, as institutions with assets over $1 billion reported an average allocation of 58%, while institutions with assets under $25 million reported an average alternatives allocation of 9%. In general, allocations to international equities and short-term securities/cash/other were more consistent across the size cohorts.

The final results from this research will be released in January 2012.

 

Data & Research November 7, 2011

Survey Finds Most Investors Understand Target-Date Funds

Understanding of target-date funds (TDFs) is high, according to research from AllianceBernstein. 
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This includes what the “date” in a TDF’s name means and how the asset-allocation strategy for a target-date fund becomes more conservative over time. The firm’s seventh annual Inside the Minds of Plan Participants survey also found that investors are very satisfied with these funds, with 81% reporting being equally or more satisfied with their TDF investment performance in comparison to the other funds offered in their plans. However, 51% mistakenly believe that using target-date funds will guarantee that their retirement income needs will be met.  

According to this year’s survey, 26% of respondents are now confident that they will have a comfortable retirement, versus 18% in 2009. These levels nonetheless trail the enthusiasm recorded in 2007, when 41% of respondents indicated that they felt confident they would have a comfortable retirement. Two-thirds of respondents cite a steady stream of retirement income as a very important feature in a defined contribution investment option. Among other items that appeal to respondents, the survey found that over 90% of investors would value a personalized forecast that would help them understand their expected annual income from their retirement plan. 

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As in previous years, the survey finds two distinct groups of workers with different attitudes and actions toward investing. The continued consistency of these two groups provides useful insight into understanding the behavior of plan participants. When asked to describe how they feel about investing, 43% described themselves in 2011 as “Active” investors—they enjoy making retirement savings and investment decisions and are confident about their retirement prospects. The 57% who described themselves as “Accidental” investors don’t enjoy investing, don’t pay much attention to it, and are not confident in their ability to make investment decisions. 

Investors indicate a clear satisfaction with and general understanding of target-date funds across groups—with some emerging misperceptions. Between 2005 and 2011, use of target-date funds by Actives almost doubled, increasing from 22% to 41%. Accidentals also increased their usage of target-date funds, but by a lower percentage, from 16% to 25%. On the other hand, the percentage of Accidentals allocating 40% or more of their overall portfolios to target-date funds between 2007 and today grew faster than for Active investors, increasing 26% for Accidentals versus 9% for Actives. Three-fourths of both Actives and Accidentals agreed that target-date funds become more conservative as retirement approaches. When asked whether target-date funds guarantee that an investor will meet his or her income needs in retirement, surprisingly, 59% of Active investors and 38% of Accidentals incorrectly indicated “true.”  

When given a list of choices regarding investment options—such as upside potential, downside protection, a diversified investment mix, a steady income stream in retirement, no-fee access to money, and principal protection—two-thirds of investors selected “a steady income stream in retirement” as the most important. 

Similarly, if there were a guaranteed income feature in a target-date fund, 78% of Actives and 69% of Accidentals reported that they would be likely to invest in it. Strikingly, 73% of respondents did not know an effective range for an annual draw-down of a hypothetical $500,000 account balance while having a good chance to sustain income throughout retirement. Instead of choosing what most financial experts would consider to be a reasonable 1-3 or 4-6 percentage rate of their initial account value to withdraw each year in retirement, respondents overestimated the amount they could withdraw, by choosing 7%–9% or 10%+, or said they “don’t know.”  

Significantly, 95% of Active investors and 91% of Accidental investors said they would value a forecast to help them understand how much annual income they could expect to receive from their retirement plan based on their current account balance, asset allocation and deferral rate.  

AllianceBernstein conducted its seventh annual web-based survey in February 2011. It included 1,000 full-time employees age 18 or older. All of the participants worked for companies that offered defined contribution retirement plans, such as 401(k)s. 

For a copy of Inside the Minds of Plan Participants, visit http://www.abdc.com.

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