Another goal at Northwestern, Ms. Falls said, is to position the endowment among the top quartile of its peers in terms of returns.
The endowment's annualized returns topped those of its composite benchmark in all measured periods at its Aug. 31 fiscal year-end, with a 37% return for the one-year period, (benchmark, 30.2%); three years, 14.6%, (13.8%); five years, 13.1%, (12.6%); 10 years, 10.2%, (9.7%); and 20 years, 9.1% (8.2%).
Ms. Falls said the asset allocation changes for the endowment since she joined a year ago weren't radical, but the team did redefine the endowment's real assets portfolio.
"For years, real asset portfolios have been a hodgepodge of different strategies that vary greatly in terms of risk and return characteristics," Ms. Falls said, noting that rising equity exposure and the potential for higher inflation led her team to make changes to the real assets portfolio, which totaled about $1.9 billion as of Aug. 31.
The real assets portfolio is now split into three broad, separate asset allocation categories: equity-oriented, income-oriented and store-of-value, Ms. Falls said.
The equity-oriented part of the portfolio includes mining and exploration and opportunistic real estate partnerships and entail a higher degree of operational and financial risk. Returns for this portfolio are expected to be between 10% to 12%, Ms. Falls said.
The income-oriented real assets category is a bond equivalent that focuses on investment in core real estate, royalty funds, timber, agriculture and Treasury inflation-protected securities. These investments' primary source of returns is a cash-flow stream generated by the underlying assets that usually are linked to price increases. Expected returns are below 4%, Ms. Falls said.
The store-of-value real assets sleeve can invest in gold, cash, art and other goods. She said the expected return for the store-of-value category is between zero and 2%.
Including the changes to the real assets portfolio, the endowment's new target asset allocation adopted in September is 20% venture capital; 15% private equity; 10% U.S. equity; 9% global long/short equity; 8% uncorrelated strategies; 6% each developed markets equity, emerging markets equity, multistrategy, equity-oriented real assets and fixed income; 4% each income-oriented real assets and credit; and zero to store-of-value real assets.
In contrast, the target allocation as of Aug. 31 was 27% private investments (global buyouts and venture capital), 20% absolute return, 19% international equity, 14% real assets, 12% U.S. equity and 8% fixed income.
The combined 10% target allocation to the real asset categories in the endowment's current asset allocation is 4 percentage points lower than the prior allocation.