Endowments and foundations — institutional investors best known for broad portfolio diversification and cutting-edge investment strategies — dramatically increased their allocations to passive domestic equities last year as the global financial crisis exposed significant liquidity problems.
According to a forthcoming report from Greenwich Associates, allocations to active U.S. stocks in endowment and foundation portfolios declined to 11.5% in 2009 from 22.9% in 2008. Over the same period, allocations to passive domestic equities increased to 16.4% from 5.5%.
Among endowments and foundations with more than $1 billion in assets, the shift was more dramatic. The allocation to active U.S. stocks fell to 9.3% from 22.7% while allocations to passive U.S. equities jumped to 18.9% from 5%.
In addition, the proportion of endowments and foundations employing at least one passive U.S. equity manager increased to 63% in 2009 from 46% in 2008.
“An industrywide shift out of active management for U.S. equities and into passive was a major topic of discussion in 2009,” said Dev Clifford, a consultant at Greenwich Associates, in the report. “These results suggest this trend is real, and it is being driven by endowments and foundations.”
The well-documented liquidity problems at many endowments and foundations did not push them as a group to raise cash holdings, according to Greenwich Associates, based in Stamford, Conn.
Last year, money market funds represented only 0.1% of total endowment and foundation assets, compared with 0.5% among public pension funds and 1.6% among corporate funds.
“While many observers were expecting a significant and permanent increase in institutional cash holdings following the liquidity crunches experienced by some funds last year, what we have seen instead is a more modest change,” Greenwich Associates analyst Chris McNickle said in the report. “Rather than incorporating a larger liquidity component into the fund's investment and portfolio strategy, many institutions have addressed the issue by increasing the amount of cash they hold from, say, one month's requirement to three months.”