Foundations, Endowments Change Investment Strategies
November 19, 2009 (PLANSPONSOR.com) - Endowments and foundations (E&Fs), concerned with the potential negative effects of a low investment return environment, are balancing their preference for investment strategies that promise higher returns with their top two concerns: risk management and funding their operating budgets, according to a Pyramis Pulse Survey of 109 of the largest E&Fs in the United States.
Endowments, which ranked a low investment return environment as their top concern (29%), are increasing allocations to strategies such as real estate, private equity, and commodities with a view to enhancing returns while balancing those investments — which often require extended time commitments — with more liquid strategies like global and emerging markets equities, according to a press release. Foundations, citing the ability to fund operating budgets as their top concern (34%), are sticking with more liquid, traditional asset classes like global and emerging markets equities as well as Treasury Inflation Protected Securities (TIPS).
The Pyramis E&Fs Pulse Poll showed E&Fs plan to
emphasize diversification by strategically increasing allocations to emerging
markets equity (42%), and global equity (32%), the press release said. Other
asset classes targeted for increase included commodities (29%), TIPS (28%), international
equity (27%), real estate (25%), fixed income (22%), and private equity (20%).
Endowments were more likely than foundations to increase
allocations to relatively illiquid assets such as real estate, private equity,
commodities, and infrastructure. Foundations were more likely than endowments
to increase allocations to emerging markets equity, international equity, and
global equity strategies.
The Pyramis E&Fs Pulse Poll found 32% of endowments
feel their portfolio is more risky than it was five years ago, while 46% of
foundations have reduced risk in their portfolios over the last five years. At
48%, risk management was the top concern of large funds, while mid-sized funds
selected ability to fund operating budget/liquidity risk more frequently (33%).
Respondents indicated lower levels of confidence in their
ability to measure risk in virtually every individual asset class when compared
with their attitudes in 2006’s Pyramis survey. The number of respondents who
felt they could measure risk "very well" in 2009 compared with 2006
declined most notably with traditional asset classes: investment grade fixed
income (74% to 43%), U.S. equities (62% to 32%), and international equities (43% to 24%).
E&Fs responded that one of the primary obstacles to
assessing risk is that investment models and metrics are based on the
assumption that returns are normally distributed (38%). These assumptions
assign a low probability to extreme market events or "fat tails" like
2008. Other obstacles to assessing risk cited by respondents include lack of transparency
from managers (35%) and lack of appropriate systems or tools (16%).
While 29% of respondents have not made any changes to
their risk management processes post‐2008, 58% of endowments are making improvements by
conducting additional liquidity analysis and forecasting and 36% of foundations
are requiring more transparency from their managers. The survey also found
E&Fs are considering strategic partnerships and CIO outsourcing with
consultants, asset managers, and dedicated outsourcing firms.
Ten years from now endowments and foundations predict
they will look at their asset allocation differently as 40% of endowments will
allocate their capital using a factor-based model (inflation, volatility,
liquidity, interest rates) while 46% of foundations will continue to invest
using the traditional 60/40 equity/fixed income asset allocation model.