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Crypto Craze Finds Few Fans at Endowments. Maybe Not For Long

“There are still just so many questions surrounding volatility, liquidity and regulation."

By Kate Smith

(Bloomberg) --Endowments and foundations are steering clear of the crypto-craze. At least for now.

Ninety-six percent of top officers at these organizations said they aren’t investing in cryptocurrencies and have no plans to do so, according a survey released Monday by consulting firm NEPC. But plenty of them are intrigued.

While just two percent of respondents said they’ve already entered the digital market, about 20 percent of NEPC’s endowment and foundation clients have started looking into the asset class, said Scott Perry, a partner at NEPC. Clients of the Boston-based firm include more than 100 such institutions with total assets of about $62 billion.

“Cryptocurrencies in theory could be a real return enhancement and an interesting holding in a world that isn’t awash with lucrative investment ideas,” Perry, who focuses on endowment and foundations, said in a telephone interview.

Endowments are on the hunt for returns at a time when their asset mix has come up short. The 10-year average return among U.S. university endowments was 4.6 percent through June 30, according to the National Association of College and University Business Officers. While most institutions aim for annual real returns of 4 percent to 5 percent, investing in a market-tracking index fund holding 60 percent stocks and 40 percent bonds would have produced a 6.4 percent gain in the same time, making the fees attached to hedge funds and other under performing alternative strategies fees difficult to justify.

Bitcoin, the first widely used and largest digital currency, is proving to be among the most intriguing -- and terrifying -- asset classes. In the span of just nine months, it has reached a record high of almost $20,000 only to plummet to roughly half that. Yet that still leaves the notoriously volatile currency up more than 300 percent since July, the start of the fiscal year for most universities. Which explains why NEPC doesn’t recommend cryptocurrencies to institutional clients.

“There are still just so many questions surrounding volatility, liquidity and regulation,” Perry said. “We take a strong view against its representation in our clients’ portfolios.”

Aside from avoiding digital currencies, 40 percent of survey respondents said they planned to dump their domestic equity holdings in part because they don’t expect the bull market to continue its run.

The NEPC expects U.S. stocks to gain 6 percent annually over the next five years. Meanwhile, the S&P 500 is up about 14 percent since July 1. That comes after a particularly lucrative fiscal 2017, when U.S. stocks outperformed private equity and hedge funds, raising questions as to why endowments and foundations were paying high fees for low returns.

Endowments and foundations are looking abroad for returns. Almost half of the business officers surveyed by NEPC said they thought emerging market stocks would produce the highest returns in 2018. About a quarter said they were increasing allocations to the asset class, while 68 percent said their positions would remain unchanged. On average, among the endowments and foundation polled, business officers allocated about 6 percent to emerging markets.

The NEPC survey, conducted last month, is based on interviews with 47 business officers at U.S. endowment and foundations.
To contact the reporter on this story: Kate Smith in New York at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Alan Mirabella, Mary Romano

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