Endowment execs focus on liquidity, volatility in post-crisis market
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Jeffrey Epstein and Leon Black
      Leon Black to retire as CEO of Apollo Global
      Coller Capital collects $9 billion with latest secondaries fund
      Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
      Kennedy Lewis raises $2.1 billion for latest opportunistic credit fund
    • Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Amy Hsiang
      Meketa picks new public markets manager research director
      Will Martindale
      Cardano Group chooses group head of sustainability
    • CalSTRS participant retirements jump in second half of 2020
      Mexico manages breakthrough in virus-marred year
      Coronavirus throwing retirement systems into a deepening hole
      COVID-19 hinders emerging Europe's hopes for DC boost
    • Signage outside the Blackstone Group Inc. headquarters in New York on July 13, 2019
      Blackstone to sell Alight to SPAC in $7.3 billion deal
      Joni Tibbetts
      Principal counts on advisers to get word out on PEPs
      Jan Jacobson
      High-court ruling thwarts ERISA stock-drop lawsuits
      Kenneth J. Munro III
      Empower names new national sales director
    • Emissions rise from a coal-fired power plant
      NYC pension funds to divest fossil fuels
      A Eurosystem monetary authority sign outside the European Central Bank headquarters in Frankfurt on March 7, 2019
      ECB considers going greener in staff pension fund
      Investors offer advice to ministers for U.K.’s low-carbon ambitions
      Shannon O'Leary
      Resisting diversity could lead to termination
    • Hawk's Nest dam
      Brookfield donates golf course for firefighter training center
      Gifford Fong
      Old ties help bring local version of JOIM to mainland China
      Ryan Tedder
      Strike up the band: KKR fund takes majority stake in Ryan Tedder catalog
      Helen Dean
      NEST’s Helen Dean earns U.K. recognition for service
    • Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
    • Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Indiana roofers union pension fund applies for MPRA benefit cuts
      SEI picks Delaware Investments as equity fund subadviser
      Global managers fail to meet U.K. cost transparency standards
    • CI Financial to acquire Segall Bryant
      watch video
      1:33
      A look at hiring activity in 2020
      Caroline Feeney
      Prudential Financial adds CEO of insurance and retirement
      HSBC GAM selects heads of health-care equity investment team
    • Canadian plans cap 2020 with 10% annual return – Northern Trust
      CalSTRS participant retirements jump in second half of 2020
      A sign outside California Public Employees' Retirement System headquarters in Sacramento
      CalPERS expecting to announce new CIO this quarter
      Marcie Frost
      California pension funds learning from experience
    • Jeffrey Epstein and Leon Black
      Leon Black to retire as CEO of Apollo Global
      Caroline Feeney
      Prudential Financial adds CEO of insurance and retirement
      HSBC GAM selects heads of health-care equity investment team
      Rene Buehlmann
      Standard Life Aberdeen makes senior leadership changes in APAC, U.K. and EMEA
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Retirement in emerging markets
      Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • SEI picks Delaware Investments as equity fund subadviser
      Trenton, Mich., swings to Fidelity to run $20 million in large-cap equities
      Los Angeles school district seeks third-party administrators 403(b) plan
      Los Angeles County Employees casting for private equity consultant
    • SEI picks Delaware Investments as equity fund subadviser
      Trenton, Mich., swings to Fidelity to run $20 million in large-cap equities
      Los Angeles school district seeks third-party administrators 403(b) plan
      Los Angeles County Employees casting for private equity consultant
    • Co-Administration, Financial Advisory, Transfer Agent, and Custodial Services
      Maryland State Retirement and Pension System
      Master Custodian and Related Services
      Transition Management Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      Cartoons depict a year like no other
      view gallery
      25 photos
      2020 in editorial Cartoons
    • GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
      Gold Outlook 2021
      Bond ETFs show maturity during Covid market mayhem
      2021 Outlook: A rousing recovery
    • Charles E.F. MIllard
      Commentary: It’s time to make 401(k) plans into real pension plans
      Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:33
      A look at hiring activity in 2020
      watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
    • POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for January 2021
      Graphic: A look at hiring activity in 2020
      Riskwatch for Q4 2020
      Taiwan Semiconductor’s No. 1 in the emerging markets book
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
March 07, 2011 12:00 AM

Endowment execs focus on liquidity, volatility in post-crisis market

Funds working to cope with higher costs, lower income

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Post-crisis pressure on U.S. endowments to provide a greater portion of the colleges' and universities' operating budgets has put a new premium on liquidity and long-term asset growth that's resulting in asset allocation changes.

    Average cash holdings are up significantly, investment in long-only domestic equity is down, and allocations to alternative investments are rising, especially to more liquid vehicles and asset classes such as hedge funds, commodities, TIPS and other real assets.

    Sources said chief investment officers are coping with two disparate goals in managing their portfolios: having enough ready cash to meet their institutions' higher spending rates; and growing the endowment in perpetuity.

    Higher-education finance departments are feeling the stress of lower income from traditional sources — alumni donations, grants, tuition increases — while simultaneously coping with rising operating costs and higher debt levels. The upshot at many schools is a greater reliance on the endowment to plug holes in the operating budget.

    As a result, CIOs are more focused than they were before the 2008 market crisis on maintaining liquidity and controlling volatility so the value of the endowment and investment returns are less vulnerable to market impacts.

    The problem is that it will take a few years just to bring endowment pools up to their pre-crisis levels, said Verne O. Sedlacek, president and CEO of Commonfund, Wilton, Conn.

    “Though 2010 was an excellent year in terms of performance, not all endowments are out of the woods yet,” Mr. Sedlacek said during a news briefing last month. He noted that assets of the majority of U.S. endowment funds still are about 25% lower than they were at the end their 2007 fiscal year. He predicted it will take “at least three or four more years of good markets before endowments return to their 2008 pre-crisis levels.”

    At least one source is less optimistic.

    Analysis of 110 years of market data indicates “it takes a fairly long time — decades, rather than years — to recover from a sharp market shock,” said Celia Dallas, co-director of research at investment consultant Cambridge Associates LLC, Boston. Ms. Dallas made her remarks in a presentation about volatility at the National Association of College and University Business Officers' January endowment management conference in New York.

    In order to preserve the present value of the endowment, CIOs have honed in on volatility control and risk management.

    “We've been talking to endowment clients about volatility since 2008 and have counseled that it is here to stay. The question is whether you can live with volatility and how you manage it,” Keith Luke, managing director at Commonfund, said during an interview in his office in Wilton.

    Mr. Luke said endowment CIOs are dealing with volatility on the investment side through a renewed emphasis on tail-risk hedging to control the impact of market movements on the portfolio.

    “Volatility's impact on the endowment portfolio “has real implications for how you can meet the spending rate set by the university. You have to control the risk of volatility through asset allocation, seeking truly non-correlated alpha,” Mr. Luke said.

    And diversifying the portfolio and ensuring ready liquidity is what the majority of U.S. endowment funds have been doing, according to data from the 2010 NACUBO-Commonfund Study of Endowments.

    No dramatic change

    The average asset allocation in the survey of 850 U.S. institutions did not change dramatically in the year ended June 30, with domestic equities at 15%; fixed income, 12%; international equities, 16%; alternatives, 52%; and cash and short-term securities, 5%.

    But in the two fiscal years since the market crisis of 2008, endowment CIOs surveyed took steps to reduce the volatility of their portfolios. For example, a four percentage-point increase in cash was significant, especially since cash tends to be a drag on performance, Commonfund's Mr. Sedlacek noted during the news briefing. He considered this a sign that CIOs and boards are concerned about maintaining liquidity in their portfolios.

    As part of the move to minimize volatility, endowment CIOs also reduced their domestic equity exposure eight percentage points as of June 30, from 23% as of June 30, 2008, and international equity dropped two percentage points from 18% over the same time frame.

    Alternatives increased six points during the two years, which Mr. Sedlacek said reduces volatility through diversification.

    The average investment return of was 11.9% in the year ended June 30, a significant improvement over -18.7% a year earlier. But long-term investment returns still are not high enough, John D. Walda, president and CEO of NACUBO, said at the news briefing.

    Over the three years ended June 30, U.S. endowment returns still were negative, with an average return of -4.2%. Average returns went back into positive territory, with 3% over five years and 3.4% over 10 years, according to the study. Multiyear returns are annualized and net of fees.

    Volatility, as measured by the difference in returns year by year, was fairly high, Mr. Walda said. The average return as of June 30 was -3.54% in 2001; -6.25% in 2002; 3.2% in 2003; 15.3% in 2004; 9.3% in 2005; 10.8% in 2006; 17.2% in 2007; -3% in 2008; -18.7%; in 2009; and 11.9% last year.

    What's clear from a 10-year comparison is that college and university spending rates have not varied greatly despite fairly high volatility of investment returns.

    Analysis of average annual spending rate and investment return data from the 2010 NACUBO-Commonfund Study shows that even in years of negative performance — 2001, 2002, 2008 and 2009 — spending rates were 4.9%, 5%, 4.3% and 4.4%, respectively.

    The annual spending rate is defined by the study's researchers as the percentage of the beginning market value of the endowment that is withdrawn to support institutional expenditures. The rate is net of fees and expenses.

    So despite strong average performance in the most recent fiscal year, the volatility of investment returns over the 10-year period means “endowment returns still are not sufficient to meet the needs” of the sponsoring institutions, Mr. Walda said. “An investment return of 3.4% over 10 years won't preserve endowment assets over the long term,” considering the possibility of rising inflation in future and an average target endowment spending rate of 5%, he said.

    “Endowments exist to provide the institution with sufficient income in perpetuity. There has to be emphasis on very long-term returns,” Mr. Walda said.

    The problem with trying to meet a 5% spending target is that “you really need an 8.5% return in order to hit that after expenses,” Heather Myers, director of endowment and foundation strategies for Russell Investments in New York, said in an interview. “It's going to be hard to meet this expected investment return, given lowered capital market return expectations.”

    Cambridge's Ms. Dallas noted in her conference presentation that even extensively diversified portfolios still were hurt when asset-class correlations narrowed in the most recent market crisis.

    “Diversification works about 95% of the time,” Ms. Dallas said, and in order to cope with the 5% of the time when it doesn't, many endowment CIOs are moving to “contingency planning.”

    The goal is to build a diversified portfolio that works in normal market conditions and is flexible enough to be resilient in stressed environments, Ms. Dallas said.

    Shifting away

    That said, as evidenced by NACUBO-Commonfund data, many endowment CIOs are shifting away the famous “Yale model” that was developed by David Swenson, CIO of New Haven, Conn.-based Yale University's $16.7 billion endowment.

    That model largely eschews liquidity concerns and concentrates assets in less liquid alternatives such as real estate and private equity, said Daniel Wallick, principal, Vanguard Investment Strategy Group, a unit of The Vanguard Group of Investment Cos., Malvern, Pa.

    Mr. Wallick said the endowment world's pre-2008 “blind emulation” of the Yale approach “has passed.”

    “Liquidity was largely ignored before the 2008 crisis. A lot of endowments had liquidity problems because their portfolios were heavily weighted to private equity and capital calls had to be met. The situation back then has made a lot of endowment CIOs consider the impact of alternatives on their portfolios now.”

    “Everyone wanted to look like Harvard College. Now, everyone wants to look like a community college. There is much less interest now in peer rankings,” George Dunn, executive director of Convergent Wealth Advisors LLC, Washington, said in a presentation at the conference.

    Mr. Dunn recommended CIOs add target ranges to existing asset classes and to amend endowment investment policy statements to allow investment in new asset classes “so you're ready to jump on opportunities.”

    The endowment of Ohio State University, Columbus, has established “bands” around target asset allocations to enable investment staff to manage the $18.9 billion endowment tactically during difficult market conditions, Jonathan D. Hook, vice president and CIO, said during a presentation at the NACUBO conference.

    “We had to provide trustees with a lot of education about this concept, but having done that, the decision to provide more flexibility in managing the portfolio was not that difficult,” Mr. Hook said.

    Portfolio volatility was reduced within the equity portfolio, Mr. Hook said, by converting “a big part” of the allocation to long/short equity hedge funds, global macro and foreign exchange.

    About 3% of the OSU operating budget comes from the endowment.

    Abilene Christian College, Abilene, Texas, did not have liquidity constraints within its $290 million endowment during the market crisis, but the crisis did “change how we think about liquidity,” Jack Rich, senior vice president and CIO, said at the NACUBO conference.

    Between 10% and 15% of ACU's operating budget comes from endowment distributions.

    Mr. Rich said investment staff considered capital calls and necessary distributions from the endowment over a three-year period and created three “liquidity columns” within the portfolio: investments that can be redeemed in under 30 days; between 30 days and one year; and in more than a year.

    “This approach does impact how we pick managers. For example, we pick hedge fund managers with shorter liquidity terms. It also influences how much we have in traditional, long-only equity managers,” Mr. Rich said.

    Related Articles
    U.S. endowment assets up; Harvard still No. 1
    Endowment reporting distorted
    New outsourced CIO firm targets endowments, foundations
    U.S. endowments up nearly 20% for year, Commonfund-NACUBO study shows
    Large endowments grab healthy portfolio gains
    College endowment returns surge for fiscal year 2011
    Charities turn unconventional
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    2021 Outlook: A rousing recovery
    Climate change and emerging markets after Covid-19
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center