College Endowments Shift Investing Strategies

Colleges consistently depend on using a certain percentage of the returns from their endowment every year, but because of the near zero percent interest rate environment they find themselves having to rethink their investment strategies.

"We do it in a variety of ways and its not just in stocks and bonds. We do it with a certain investment style that includes things in the short-term and in the long-term that will perspectively go higher. Right now that is largely commodities, hard assets—gold and emerging markets," Jim Hille the CIO of Texas Christian University told CNBC's "The Strategy Session" on Wednesday.

Texas Christian University's Endowment:

  • 23 percent to Hedge Funds
  • 12 percent to Private Equity
  • 5 percent to Real Estate
  • 15 percent to Commodities

Charles Cocke, the managing director of Investure, which manages over ten endowment schools, has a slightly different approach.

"We spend almost all of our time trying to understand what something's worth. Commodities are particularly hard to do that on. But I do think there is some opportunity in good businesses available at reasonably prices. I mean you can buy businesses that are extremely high quality and have almost double-digit free cash-flow yields. The question is, does the market care?," Cocke said.

Overall, Investure manages about $6 billion for endowment and foundation consortium partners, which includes Dickinson, Smith, Middlebury Barnard, Trinity, University of Tulsa and four foundations.

"It's extraordinary challenging. There's no question about it. We use a building block type of model, starts with zero interest rates. There's a risk premium that stocks offer and that doesn't get us what we need—5 percent every year on a consistent basis," Hille said.

"This is an usually difficult period. If cash isn't going to remotely help you achieve the five [percent] before inflationary spending pressures, it's pretty hard to figure out where it's going to come from. And you have to question whether you are getting paid to be patient," Cocke said, adding, "the things I try to do when I am not managing our existing portfolio or talking to our clients is trying to uncover the next great investor."