While ramping up exposures to alternative assets could boost the investment returns of university endowments in the Asia-Pacific region, a number of administrative and resourcing barriers impede such action, a recent survey by asset consultant Mercer has found.
Only half of the university endowments in Australia and New Zealand hold alternatives in their long-term investment portfolios, despite their highly accommodating investment horizons that can tolerate illiquidity and short-term volatility, the 2008 Mercer Asia-Pacific University Investment Study found.
While the average allocation to alternatives among surveyed universities increased from 1 per cent of total assets in 2005 to 4 per cent in 2008, these investments lagged the average of US endowment funds, which is between 14 and 15 per cent.
However Simon Eagleton, head of Mercer Investment Consulting in Australia and New Zealand, said that many of the universities surveyed were restricted from allocating to alternatives by statutory or charter restrictions and also by the lack of internal or external expertise and insight into the advantages of alternatives.
Mercer found that for 14 per cent of respondents, balancing spending requirements against expected returns was a key concern for the coming two years, as high inflation and lower returns from equity markets will test the strength of spending policies. “They might find that returns are not sufficient to fund vital expenditure on capital works,” Eagleton said.
However, only one respondent indicated they were reviewing spending policy over the next 12 months. Mercer also identified that universities could better hedge their currency exposures through overseas investments – just 17 per cent of respondents separately managed their currency exposures, and most commonly the hedging was applied to only the overseas shares portion of the portfolio.
Eagleton concluded that universities in the Asia-Pacific region could further exploit their long-term investment horizons and their low level of peer competition compared to other areas of the institutional investment industry. However the universities faced the challenges of resourcing internal teams and negotiating with stakeholders in their respective institutions given the multiple business priorities on campus.
The survey covered 30 universities in Australia, New Zealand, Japan and Hong Kong. See cover story on page 16