Largest U.S. university endowment funds pull back on ETF exposure

[September 14, 2017]  By David Randall

NEW YORK (Reuters) - The largest U.S. college endowment funds are pulling back their holdings of exchange-traded funds even as they invest more money in passive strategies overall, a move that may help bolster traditional mutual fund managers at a time when ETF providers like BlackRock Inc are seeing the majority of investor inflows.

The 10 largest higher education endowment funds in the United States now have an average of 14.4 percent of their direct equity portfolios in ETFs, a 15 percent decline from this time two years ago, according to a Reuters analysis of U.S. Securities and Exchange Commission filings. These filings do not reflect an endowment fund's assets invested in traditional mutual funds, private equity or hedge funds, which together make up the bulk of their portfolios.

In most cases, university endowments that are pulling back on ETFs in their direct portfolios are replacing them with increased holdings of individual shares.

The $10.4 billion University of Notre Dame endowment fund, for instance, reduced its holdings of ETFs from 57 percent of its direct equity portfolio to 2.1 percent over the last two years, SEC filings show. Its largest holdings now include Chinese e-commerce company JD.com Inc, Ally Financial Inc and Charter Communications Inc.

The university declined to comment for this story.

Other large endowment funds that significantly cut back their ETF exposure include the $40 billion University of Texas system and $7 billion Emory University, filings show.

Graduates celebrate during a commencement ceremony in New York in this May 18, 2005 file photo. REUTERS/Chip East/Files

Todd Rosenbluth, director of ETF research at New York-based CFRA, said that endowment fund managers are often more comfortable with traditional mutual funds because they do not need the flexibility to trade throughout the day that ETFs provide. In response, BlackRock has been launching mutual fund versions of its popular factor-based ETFs in order to appeal to larger institutional investors, he said.

With U.S. stocks near record highs, portfolio managers may add more value by selecting the shares of individual companies rather than buying a broad ETF. The benchmark S&P 500 is up 11.5 percent for the year to date and trades at a trailing price-to-earnings ratio of 22.1, well above the roughly 18 multiple that it traded at three years ago.

Overall, endowment funds get 30 percent of their U.S. equity exposure through passive strategies, nearly double the rate of three years ago, according to a study of more than 800 schools by the National Association of College and University Business Officers.

(Reporting by David Randall; Editing by Jennifer Ablan and Frances Kerry)

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