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Industry Voices

Why small to midsize endowments shouldn’t follow the Ivy League

Large endowments, admired for their asset allocation strategies and long-term approaches, are often touted as the ideal model for other endowments. However, as evidenced by the 2016 NACUBO Commonfund Study of Endowments, small and midsize endowments need to take a different approach or risk continuing to see negative returns.

Small and midsize endowments face a number of different challenges and needs from large endowments. Smaller endowments typically have higher turnover on investment committees, less internal resources and fewer assets for leverage. These endowments aim to minimize operational costs and not stretch resources too thin, while still generating long-term returns that don't take on too much risk.

Instead of rote following of the Yale model, smaller endowments should consider the following factors to meet their own unique challenges.

Asset allocation

Large endowments typically invest in alternatives such as hedge funds, private equity and real assets. Due to their size, large endowments are able to commit significant assets to alternative investments, which enable them to negotiate fees on the higher-cost funds.

But alternative investments have costs that go beyond fees. They also tend to have higher risk, high minimums and, most importantly, they tend to be very illiquid. According to the NACUBO Commonfund study, institutions saw a negative return on investments in alternative strategies and international equities.

Smaller endowments don't have the luxury with liquidity. If small endowments are invested in alternatives, they need other sources to meet immediate spending needs for operating budgets, scholarships and other necessities. Instead of alternative investments, small and midsize endowments might be better served with a return to basics — a portfolio of low-cost, transparent, diversified funds.

Investment advisers

Institutions with less than $100 million to invest often cannot afford in-house expertise. There is a broad range of markets and asset classes that endowments can use, and investment officers need to be up-to-date on these options. However, investment officers already have multiple roles, so it can be difficult to stay informed on asset classes.

Without in-house expertise, small and midsize endowments should work with outside fiduciaries that serve as a true partner. Outside advisers need be more than a vendor, they should put the intent and needs of the endowment first, be willing to educate the investment committee and staff, help identify ways to reduce costs and possibly, even help attract new donations to increase the flow of cash.

Investment policy statement

Large endowments with long-term investment committees and chief investment officers have the ability to be patient with investments in part because they have other assets but also because their team's consistency at the helm means there is a steady vision and goals. Other institutions might not have that luxury, which makes it critical to have a strong investment policy statement.

Without consistency on the investment committee, there is a change in perspective each time new committee members join. A strong policy statement can ensure the vision and goals for the endowment remain consistent during turnover.

Key factors to a strong policy statement include investment criteria, investment monitoring, asset classes, roles and responsibilities, plan and investment objectives, and a review of expenses. When updating the policy statement, teams should not leave wording subject to interpretation.


Large endowments follow a model that was designed to take advantage of their large asset base. This strategy doesn't work for all endowments. Instead of following other investment models, investment committees for smaller endowments need to prioritize a strategy that will suit the unique factors of their endowment, and meet their specific goals.

Thomas J. Terhaar, is a consultant with Conrad Siegel Investment Advisors Inc., Harrisburg, Pa. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.