NOTRE DAME, Ind. - Executives overseeing the $1.5 billion University of Notre Dame endowment are fine-tuning the fund's allocations to various asset classes.
They specifically are looking at allocations to venture capital, U.S. equities and non-U.S. securities, and more generally at inflation hedging strategies, said Scott C. Malpass, associate vice president for finance and chief investment officer.
The changes follow an extended period in which Notre Dame expanded and diversified its asset class exposures to the point where a major market U.S. stock market correction is not a worry.
Even though its overall equity allocation has risen, the endowment's U.S. stock market exposure has fallen as a percentage of total assets.
The biggest risk to the fund is that the Dow Jones industrial average goes to 16,000, and even then, the endowment fund probably would do well, Mr. Malpass said.
Currently, the completely externally managed fund has an 85% allocation to equities. About a quarter of the equity allocation is in mainly U.S. private deals and U.S. real estate; another third is invested in international and global stock allocations, Mr. Malpass said.
About 10 years ago, Notre Dame's endowment was 70% in equities, with most of it invested in U.S. stocks, he said.
Mr. Malpass declined to discuss external managers for the fund.
Venture capital and other private equity strategies, considered part of the fund's equity allocation, has risen steadily over the years, and now comprises 15% of the overall fund.
That is a tremendous amount of absolute growth, because as the allocation has risen - from 1% about 10 years ago - the fund has grown as well, Mr. Malpass said.
He said that through happenstance, the Notre Dame fund got into venture capital at just about the right time.
Overall, the fund's preliminary return for the fiscal year ended June 30 was about 22%, net of fees, he said.
Mr. Malpass said he doesn't see Notre Dame's fund being a market leader, but instead he shoots for consistent top quartile performance relative to peers.
"We're so diversified, it would be virtually impossible to be the best performer," he said.
Overseas private equity is expected to become a larger part of Notre Dame's portfolio as well.
Mr. Malpass said endowment officials are prepared to put 3% or 4% of the fund into non-U.S. private equity over the next four to six years, possibly with regional targets in Asia, Europe and Latin America.
Heading up the private equity effort will be Michael Donovan, who recently was hired as senior investment director for private equity. Mr. Donovan was hired following graduation from Harvard Business School, and has previous work experience as well as a law degree, Mr. Malpass said.
Notre Dame's U.S. stock market exposure might shift as well.
The endowment fund hires money managers with large-, mid-, and small-capitalization focus with growth, value, or opportunistic biases, and may alter the weightings to those categories.
The opportunistic portion of its U.S. equity allocation could be increased, Mr. Malpass said.
And although the fund favors value stocks on a policy basis - its target is 60% value, 40% growth - the fund has been slightly overweighted to growth stocks, particularly in large cap, he said.
The fund favors value on the smaller end of the capitalization scale, he said.
Meanwhile, portfolios investing outside of the United States may be changed to less of a core approach.
Notre Dame has two-thirds of its global equity assets in core strategies, with half in pure international and half in global mandates.
The other one-third is in rotational strategies. That part could rise to one-half of the global allocation, opening the possibility for regional strategies, Mr. Malpass said.
He said the endowment is getting more aggressive about pursing non-core strategies in the international sector.
From a broader view, endowment officials continue to look at ways to hedge against a possible uptick in inflation.
"We believe things are cyclical," he said, and even a small uptick in inflation, say from 3.5% annually to 4%, could produce strong returns in markets such as commodities. But there's no sign of 1970s types of inflation, he added.
Included in the inflation hedging category would be private equity, real estate, energy-related investments, commodities, structured notes and inflation indexed U.S. Treasury bonds.
About 12% of assets already are in real estate, energy and commodities, and they'll be looking at similar types of investments over the next three to five years, Mr. Malpass said.
Endowment officials also are considering equitizing cash positions of their external managers using S&P 500 index futures contracts. Although Notre Dame's external managers tend to remain fully invested, there is some residual cash that could be invested, he said.
Risk management issues have come to the forefront for the fund in recent years, following all of the different unexpected losses taken at various institutions. Risk management and controls have became a much bigger part of the manager evaluation process, he said.
Managers are questioned much more aggressively about how their portfolio managers are monitored and controlled, and how their back office operates, he said.
"We've all learned from all of those things," Mr. Malpass said.
But increased scrutiny of risk management might be making it more difficult for smaller firms to make the cut, he said. Smaller firms generally have fewer resources to devote to their back office and systems.
Mr. Malpass said he views risk management as a personnel issue: "People control risk, not systems, not computers."
