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Is the Endowment Model Broken?

Are Endowment Funds Over-Allocating to Alternative Investments?

In the face of rising costs and declining revenue sources (especially post-COVID), colleges and universities are looking to their endowments to make up some of the shortfall. However, endowment fund performance has come under scrutiny recently, with some commentators arguing that over-allocation to alternative assets has hampered investment performance.

This collection of papers includes both performance and survey data from leading endowment funds outlining asset allocations and the disparity between investment return expectations and reality. Annual Reports from leading colleges and universities are also included, as are papers that examine how alternatives or similar strategies might enhance returns within a diversified portfolio.

yale university steps

Endowment Performance (2020)

Richard Ennis argues that endowment funds in the U.S. tend to underperform passive investment due to their outsized allocation to alternative investments. Given most respondents to endowment surveys suggest that weightings to alternatives are likely to rise, he sees underperformance continuing.

Endowments: Performance and Asset Allocation Study (BNY Mellon, 2020)

BNY Mellon looks at the investment performance of both large and small endowments against a backdrop of increasing cost pressures and declining revenue streams post-COVID.

Decoding the Performance Gap in Ivy League Endowments in 2019 (MPI)

Despite strong returns from the key private markets allocation, MPI finds that most Ivy League endowments underperformed the standard 60/40 portfolio.

2019 Endowment & Foundation Survey (CAPTRUST, Mar 2020)

In its most recent survey, CAPTRUST finds a complete mismatch between the risk tolerance and return expectations of endowments and their actual asset allocations

Prudent Management, Imprudent Investing Policies (Pace University, 2014)

This paper acts initially as an introduction to endowment investing, then goes on to question the ‘Yale Endowment Model’. The model allocates significant parts of a portfolio to illiquid, non-transparent assets in pursuit of higher returns, which has been widely adopted by many endowments.

Colorado University Foundation Sued over Investment Returns (BusinessDen, Jul 2020)

Former chairman of the University of Colorado Foundation is suing the organisation, citing disappointing investment results.

2019 Study of Endowments: Summary Results and Insights (NACUBO/TIAA)

This NACUBO/TIAA study claims to be the most comprehensive annual report into the investment policies and practices of higher education establishments across the U.S.

U.S. Endowments: Lowest Investment Returns in Four Years (Bloomberg, Aug 2020)

Bloomberg’s recent headline notes the performance returns of endowments, which are the lowest in four years – and which leave little scope for a sector already under pressure from declining revenue streams and tuition fees.

Top 100 Largest Endowment Rankings by Total Assets (SWFI, 2020)

The largest endowment funds ranked by AUM feature in this list from the Sovereign Wealth Institute.

The Yale Endowment - 2019 review (Yale University, 2020)

A deep dive into the Yale Endowment Fund, its investment policies, asset allocation and management.

The Oxford Endowment Fund Report 2019 (OUEM)

A deep dive into Oxford University’s Endowment fund (one of the UK’s largest such funds), its investment performance, policy and asset allocation.

Financial Performance of ESG Investing Strategies in Endowments (IEN, 2020)

IEN looks at a wide range of endowments, their investment policies, managers and fees. The adoption of ESG policies and how they are implemented are also put under the microscope.

Why foundations tilt portfolios towards yield (Callan blog, 2020)

This paper from Callan looks at how variations in one aspect of an endowment management – that of required annual cash flow, have profound implications for asset allocations and portfolio optimisation.

Alternative Sources of Income – A risk-based approach (Nuveen, 2020)

Nuveen argues that the income-generating properties of alternative assets are often overlooked. However, each section of the alternatives space exhibits idiosyncratic risk, which collectively needs to be carefully managed or diversification benefits may be negated.

Alternatives Through a Portfolio-Construction Lens (Blackrock blog, Jun 2020)

For compliance reasons, this paper is only accessible in the United States and Canada

Blackrock’s Pam Chan, CIO and Global Head of BlackRock’s Alternatives Solutions Group, and Mark Everitt, Head of Investment Research and Strategy for BlackRock Alternative Investors, dissect the alternatives landscape. They note that a risk-managed approach to an alternatives allocation is essential as elements of the asset classes exhibit such different characteristics.

Private Equity is From Mars, Hedge Funds are From Venus (Invesco, May 2020)

For compliance reasons, this paper is only accessible in certain geographies

Invesco looks at the various roles that alternatives play in a model portfolio allocation framework. They suggest that whilst some are core elements of any portfolio, others have a much lesser role to play.

The Lost Decade for Hedge Funds: Three threats (2019)

This paper looks at the ‘lost decade’ for hedge funds (a contributory factor to endowment fund underperformance) and offers reasons for why their edge appears to have diminished. Greater competition, increased regulation and changing market conditions are contributory factors.

Alpha, Beta and the Endowment Model (2020)

In this paper, the author discusses the Golden Age of endowment fund performance (i.e. pre-Internet Bubble). They suggest that for many investors, high allocations to alternatives still reliably add value, though it does not work in every timeframe.

Alternatives role in Portfolio Volatility? (Enterprising Investor blog, 2020)

This paper from CFA Institute sheds some doubt on the ‘high allocation to alternatives’ or ‘Yale Model’ strategy pursued by many endowment funds. They note that on this dataset, endowments neither outperform, nor benefit from volatility dampening when compared with the standard 60/40 model portfolio.

A Case for Multi Strategy Q1 2020 (Janus Henderson Investors)

For compliance reasons, this paper is only accessible in the United States and Canada

Suny Park, CFA, Head of Institutional Client Strategy and David Elms Head of Diversified Alternatives at Janus Henderson, debate the role of hedge funds in a diversified portfolio. They contend that for a variety of reasons, hedge funds have not delivered expected returns, so a Multi-Strategy approach might be worth considering instead.