Endowments make up a significant portion of institutional investors. These investors have outperformed many others by being at the forefront of new asset classes and new strategies. What are the key factors to success?
Endowments are important because they support good causes for a long time. Some have a history that spans more than five centuries. Endowments are an important category of institutional investors today.
This article is about university endowments. They have been at forefront of new investment styles and asset types. These endowments have shown outstanding risk-adjusted returns which enabled them to support their university financially.
These institutions have supportive characteristics that enable them to look for new investment opportunities. Endowments don’t have to worry about fund withdrawals. Endowments have a long investment horizon and a strong network of stakeholders. However, the investment strategy must be compatible with the endowment’s spending strategy and fundraising strategy. This must be monitored in the endowment’s governance structure, as it could restrict its investment options.
Not all university endowments have seen above-market returns. The average American university endowment is comparable to a 60% US stock allocation and a 40% US bond allocation. This reveals similar volatility and return characteristics. Only a few institutions can take advantage of the unique characteristics that university endowments might have, just as with other institutional investors. An endowment must have access to sophisticated investment strategies and skilled asset managers in order to make the most of all investment opportunities. This depends on its size and network.
These factors should allow an endowment to generate long-term sustainable returns above market risk. The observation of endowments empirically supports financial theory’s main advice: Diversify and reduce asset management costs.