瑞士百达集团
Endowment-style investing explained
The endowment investing approach, pioneered by David Swensen [1], continues to arouse growing interest from institutional investors and wealthy individual investors alike.
The endowment model is characterised by a heavy allocation to equities and alternative assets such as private equity, real assets and hedge funds, and involves significant active management to add alpha. The underlying philosophy of the endowment approach is that long-term investors have the ability to bear short-term volatility and therefore can forgo some liquidity to pursue superior returns.
Many institutional investors have adopted the endowment approach to investing, including universities, foundations, pension funds, sovereign fund and even wealth managers. The focus of this article is on American university endowments.
The largest university endowment fund belongs to Harvard University (USD51.5 bn in assets under management (AUM) at the financial year (FY) ending 30 June 2021), followed by the University of Texas and Yale University (with USD42.9 bn and USD42.3 bn, respectively, at the same date).
“The shift from traditional to alternative assets in endowments’ asset allocation started in the 1980s.”
The primary investment objective of university endowment funds is to generate sufficient returns to maintain the purchasing power of their assets in perpetuity and sustain the university’s operating budget. In general, endowments spend 4-6% of the moving average of assets under management over one to three years and target a real average annual return of 5% (adjusted for inflation) over the long term. Low liquidity needs mean endowments can tolerate relatively high short-term volatility to focus on the long-term pursuit of superior returns. As a consequence, many university endowments have relatively high allocations to public equities and illiquid private assets and smaller allocations to fixed income than classic investment firms.
The shift from traditional to alternative assets in endowments’ asset allocation started in the 1980s. The shift was led by Yale and Harvard, followed by others, mostly large ones (those with AUMs of over USD1 bn). This resulted in a big reduction in exposure to public equities and bonds (see chart 1) in the early part of this century as endowment funds moved increasingly into alternative assets that were perceived as providing diversification and higher returns. However, endowment allocations have been almost stable since 2009.
Large endowment portfolios have a far greater weighting of alternative assets than small ones (AUMs of less than USD25 mn), whose investments remain heavily focused on domestic US equities and investment-grade bonds. This can be explained by the greater resources available to the larger players.
Large US endowment funds’ allocation to public equities declined from 45% of total assets in 2002 to 29% in 2021 (having fallen to as low as 26% in 2009), while their allocation to alternative assets increased from 32% to 59% over the same period. Small funds’ asset allocations have been more stable on average and mirror those of classic 60/40 portfolios, with approximatively 60% of their assets invested in equities, 32% in fixed income and the rest in alternative assets.
Chart 1: Larger US endowment's asset allocation, 2002-2021[2]
Strong performance in 2021 improves long-term returns
Thanks to their strong FY21 performance, endowments’ average annual return over 10 years jumped from 7.5% to 8.5%. Table 1 shows the FY21 average annual return over different time periods for endowments of various sizes. It also shows average returns specifically for the Yale endowment fund as well as for classic 60/40 portfolios.
Table 1: FY21 average annual rerturns over different time periods
In general, endowments have an historical average annual nominal target return of between 7% and 7.8% over 10 years. In FY21 the target nominal return stood at 7.51%. This figure takes into account spending requirements (4.61%), long-term inflation expectations (2.08%) as well as fees and expenses (0.82%). For the current financial year, however, due to rising inflation expectations, the target nominal return has increased to 7.94% (4.60% spending, 2.3% inflation and 1.04% for fees and expenses). Endowment fund managers will therefore be more challenged to meet long-term targets in the coming years.
Have endowments achieved their long-term objective?
As mentioned, the long-term objective of university endowments is to preserve the real value of the assets they manage while supporting the university’s operating budget. This objective is generally stated as producing an average real return of 5% in excess of inflation rate. However, after accounting for gifts and donations, the annual net spending rate is usually lower (below 4% of assets). Chart 2 compares the rolling 10-year average return of Yale and large endowments in general to the combination of the spending rate and the Higher Education Price Index (HEPI, a inflation index used in institutions of higher education) over a 10-year time period, assuming a fixed average spending rate of 4% . While Yale has consistently generated returns far above target, endowments with assets over USD1 bn in general averaged slightly below the required return in 2009-2011 and again in 2018. Overall, however, large endowments can be considered to have achieved their long-term objective over the period 1999-2021 (older data are not available).
Chart 2: 10-year average endowment returns versus 10-year average inflation and spending rate
Since 1995, large endowment have consistently achieved cumulative returns above the required return (US HEPI+5%), even when assuming a spending rate of 5% . They have also constantly outperformed US 60/40 portfolios (60% S&P 500+ 40% 10-year US Treasuries, see chart 3).
Chart 3: Cumulative annual returns for all endowment funds, for Yale's endowment fund and for a 60/40 portfolio, FY1996-FY2021
Our return expectations for a standard US 60/40 portfolio over the next 10 years has been revised upwards to an annual average of 4.3%. But according to our analysis, endowment funds could provide an average annual return of 5.6% over the same period, with the largest endowments returning 6.4%.
Full list of articles
-
Private investing set to maintain investor interest
An alternative solution to shallow retuns
Read now
-
China’s ‘Big Government’ tradition and its future
The return of big government
Read now
-
Is a return to 1970s-style inflation on the cards?
A new era for inflation
Read now
-
Investors need to face the consequences of disruptive innovation
Waiting for a new innovation wave
Read now
-
Convertible bonds: a brief introduction
Tackling traditional assets' low future returns
Read now
-
Towards climate-aware asset allocations
ESG investing goes mainstream
Read now
-
Chinese equities: a leap of faith
Tackling traditional assets' low future returns
Read now
-
The uncertain promise of cryptocurrencies
The future of fiat currencies
Read now
-
Endowment-style investing explained
Looking beyond the 60/40 portfolio
Read now
-
The stock-Bond correlation
Looking beyond the 60/40 portfolio
Read now
Legal information and disclaimers
STOXX Limited (“STOXX”) is the source of Stoxx 600 and of Euro Stoxx and the data comprised therein. STOXX has not been involved in any way in the creation of any reported information and does not give any warranty and excludes any liability whatsoever (whether in negligence or otherwise) – including without limitation for the accuracy, adequateness, correctness, completeness, timeliness, and fitness for any purpose – with respect to any reported information or in relation to any errors, omissions or interruptions in the Stoxx indices mentioned on this document or its data. Any dissemination or further distribution of any such information pertaining to STOXX is prohibited.”ICE-BofA Merril Lynch. The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Pictet. ICE Data and its Third Party Suppliers accept no liability in connection with its use.NYSE Euronext. All rights in the NYSE Euronext indices and/or the NYSE Euronext index trademarks vest in NYSE Euronext and/or its licensors. Neither NYSE Euronext nor its licensors accept any liability for any errors or omissions in the NYSE Euronext indices or underlying data. No further distribution of NYSE Euronext data and/ or usage of NYSE Euronext index trademarks for the purpose of creating and/or operating a financial product is permitted without NYSE Euronext’s express written consent.”Bloomberg Index Services Limited. SIX Swiss Exchange AG (“SIX Swiss Exchange”) is the source of SMI_SPI and the data comprised therein. SIX Swiss Exchange has not been involved in any way in the creation of any reported information and does not give any warranty and excludes any liability whatsoever (whether in negligence or otherwise) – including without limitation for the accuracy, adequateness, correctness, completeness, timeliness, and fitness for any purpose – with respect to any reported information or in relation to any errors, omissions or interruptions in the SMI_SPI or its data. Any dissemination or further distribution of any such information pertaining to SIX Swiss Exchange is prohibited. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation (o make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future per¬formance analysis, forecast or prediction.The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the ”MSCI Parties ”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement. merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, fast profits) or any other damages. (www.msci.com).©2020, Markit Economics Limited. All rights reserved and all Intellectual property rights retained by “Markit Economics Limited.” or as may be notified by Markit to Pictet from time to time.The TOPIX Index Value and the TOPIX Marks are subject to the proprietary rights owned by Tokyo Stock Exchange, Inc. and Tokyo Stock Exchange, Inc. owns all rights and know-how relating to the TOPIX such as calculation, publication and use of the TOPIX Index Value and relating to the TOPIX Marks. No Product is in any way sponsored, endorsed or promoted by Tokyo Stock Exchange, Inc.Distributors: Banque Pictet & Cie SA, Route des Acacias 60, 1211 Geneva 73, Switzerland and Pictet & Cie (Europe) SA, 15A, avenue J. F. Kennedy, L-1855 Luxembourg/B.P. 687 L-2016 Luxembourg.Banque Pictet & Cie SA is established in Switzerland, exclusively licensed under Swiss Law and therefore subject to the supervision of the Swiss Financial Market Supervisory Authority (FINMA).Pictet & Cie (Europe) SA is established in Luxembourg, authorised and regulated by the Luxembourg Financial Authority, Commission de Surveillance du Secteur Financier.This marketing communication is not intended for persons who are citizens of, domiciled or resident in, or entities registered in a country or a jurisdiction in which its distribution, publication, provision or use would violate current laws and regulations.The information, data and analysis furnished in this marketing communication are disclosed for information purposes only. They do not amount to any type of recommendation, either general or tailored to the personal circumstances of any person. Unless specifically stated otherwise, all price information is indicative only. No entity of the Pictet Group may be held liable for them, nor do they constitute an offer or an invitation to buy, sell or subscribe to securities or other financial instruments. The information contained herein is the result neither of financial analysis within the meaning of the Swiss Bankers Association’s Directives on the Independence of Financial Research, nor of investment research for the purposes of the relevant EU MiFID provisions. All information and opinions expressed in this marketing communication were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness.Except for any obligations that any entity of the Pictet Group might have towards the addressee, the addressee should consider the suitability of the transaction to individual objectives and independently assess, with a professional advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.Furthermore, the information, opinions and estimates in this marketing communication reflect an evaluation as of the date of initial publication and may be changed without notice. The Pictet Group is not under any obligation to update or keep current the information contained herein. In case this marketing communication refers to the value and income of one or more securities or financial instruments, it is based on rates from the customary sources of financial information that may fluctuate. The market value of financial instruments may vary on the basis of economic, financial or political changes, currency fluctuations, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer. Some investments may not be readily realisable since the market in the securities can be illiquid. Moreover, exchange rates may have a positive or negative effect on the value, the price or the income of the securities or the related investments mentioned in this marketing communication. When investing in emerging countries, please note that the political and economic situation in those countries is significantly less stable than in industrialised countries. They are much more exposed to the risks of rapid political change and economic setbacks.Past performance must not be considered an indicator or guarantee of future performance, and the addressees of this marketing communication are fully responsible for any investments they make. No express or implied warranty is given as to future performance. Moreover, forecasts are not a reliable indicator of future performance. The content of this marketing communication can only be read and/or used by its addressee. The Pictet Group is not liable for the use, transmission or exploitation of the content of this marketing communication. Therefore, any form of reproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addressee of this marketing communication, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this marketing communication agrees to comply with the applicable laws and regulations in the jurisdictions where they use the information reproduced in this marketing communication.This marketing communication is issued by Banque Pictet & Cie SA. This publication and its content may be cited provided that the source is indicated. All rights reserved. Copyright 2020.Distributors: Bank Pictet & Cie (Asia) Ltd (“BPCAL”) in Singapore, 10 Marina Blvd #22-01 Tower 2, Marina Bay Financial Centre, Singapore 018983 and Pictet & Cie (Europe) S.A., Hong Kong branch (“Pictet HK branch”) in Hong Kong. The registered address of Pictet HK branch is 9/F, Chater House, 8 Connaught Road Central, Hong Kong.The information, tools and material presented in this marketing communication are provided for information purposes only and are not to be used or considered as an offer, an invitation to offer or solicitation to buy, sell or subscribe for any securities, commodities, derivatives, (in respect of Singapore only) futures, or other financial instruments (collectively referred to as “Investments”) or to enter into any legal relations, nor as advice or recommendation with respect to any Investments. This marketing communication is intended for general circulation and it is not directed at any particular person. This marketing communication does not have regard to the specific investment objectives, financial situation and/or the particular needs of any recipient of this marketing communication. Investors should seek independent financial advice regarding the appropriateness of investing in any Investments or adopting any strategies discussed in this marketing communication, taking into account the specific investment objectives, financial situation or particular needs of the investor, before making a commitment to invest.BPCAL/Pictet HK branch has not taken any steps to ensure that the Investments referred to in this marketing communication are suitable for any particular investor, and accepts no fiduciary duties to any investor in this regard. Furthermore, BPCAL/Pictet HK branch makes no representations and gives no advice concerning the appropriate accounting treatment or possible tax consequences of any Investment. Any investor interested in buying or making any Investment should conduct its own investigation and analysis of the Investment and consult with its own professional adviser(s) as to any Investment including the risks involved with transactions on such Investment.This marketing communication is not to be relied upon in substitution for the exercise of independent judgment. The value and income of any Investment mentioned in this marketing communication may fall as well rise. The market value may be affected by, amongst other things, changes in economic, financial, political factors, time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Furthermore, foreign currency rates of exchange may have a positive or adverse effect on the value, price or income of any Investment mentioned in this marketing communication. Accordingly, investors must be willing and able to, and effectively assume all risks and may receive back less than originally invested.Past performance should not be taken as an indication or guarantee of future performance and no representation or warranty, expressed or implied, is made by BPCAL/Pictet HK branch regarding future performance.This marketing communication does not constitute the investment policy of BPCAL/Pictet HK branch, or an investment recommendation, and merely contains the different assumptions, views and analytical methods of the analysts who prepared them. Furthermore, the information, opinions and estimates expressed herein reflect a judgment at its original date of publication and are subject to change without notice and without any obligation on BPCAL/ Pictet HK branch to update any of them. BPCAL/Pictet HK branch may have issued or distributed other reports or marketing communications that are inconsistent with, and reach different conclusions from, the information presented in this marketing communication.While the information and opinions presented herein are believed to be from sources believed to be reliable, BPCAL/Pictet HK branch is not able to, and do not make any representation or warranty as to its accuracy or completeness. Accordingly, BPCAL/Pictet HK branch accepts no liability for loss arising from the use of or reliance on this marketing communication presented for information purposes only. BPCAL/ Pictet HK branch reserves the right to act upon or use any of the information in this marketing communication at any time, including before its publication herein.BPCAL/Pictet HK branch and its affiliates (or employees thereof) may or may not have long or short positions in, and buy or sell, or otherwise have interest in, any of the Investments mentioned herein, and may or may not have relationships with the issuers of or entities connected with Investments mentioned in this marketing communication. BPCAL/Pictet HK branch and their affiliates (or employees thereof) may act inconsistently with the information and/or opinions presented in this marketing communication.The information used to prepare this marketing communication and/or any part of such information, may have been provided or circulated to employees and/or one or more clients of BPCAL/Pictet HK branch before this marketing communication was received by you and such information may have been acted upon by such recipients or by BPCAL/Pictet HK branch.This marketing communication is provided solely for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed in whole or in part to any other person without the prior written consent of BPCAL/Pictet HK branch.SingaporeThis marketing communication is not directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject BPCAL and any of its affiliates or related corporations to any prospectus or registration requirements.BPCAL has obtained an exemption from the Monetary Authority of Singapore (“MAS”) under section 100(2) of the Financial Advisers Act (“FAA”) for the provision of financial advisory services to High Net Worth Individuals (as defined in the MAS Guidelines on Exemption for Specialised Units Serving High Net Worth Individuals FAA-G07) (the “Exemption”) and is exempted from the requirements of sections 25, 27, 28 and 36 of the FAA, the MAS Notice on Recommendations on Investment Products (FAA-N16), MAS Notice on Appointment and Use of Introducers by Financial Advisers (FAA-N02), MAS Notice on Information to Clients and Product Information Disclosure (FAA-N03) and MAS Notice on Minimum Entry and Examination Requirements for Representatives of Licensed Financial Advisers and Exempt Financial Advisers (FAA-N13). Please contact BPCAL in Singapore in respect of any matters arising from, or in connection with this marketing communication.Hong KongThis marketing communication is not directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Pictet HK branch and any of its affiliates or related corporations to any prospectus or registration requirements.Pictet & Cie (Europe) S.A. is incorporated in Luxembourg with limited liability. It is an authorised institution within the meaning of the Banking Ordinance and a registered institution (CE No.: AQ515) under the SFO carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.Warning: The contents of this marketing communication have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this marketing communication, you should obtain independent professional advice. Please contact Pictet HK branch in Hong Kong in respect of any matters arising from, or in connection with this marketing communication.Distributor: Pictet Bank & Trust Limited, where registered office is located at Building 1, Bayside Executive Park, West Bay Street & Blake Road, Nassau, New Providence, The Bahamas.The marketing communication is not directed to, or intended for distribution or publication to or use by persons who are not Accredited Investors (as defined in the Securities Industry Regulations, 2012) and subject to the conditions set forth in the Securities Industry Regulations, 2012 or to any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Pictet Bank & Trust Limited to any prospectus or registration requirements. Pictet Bank & Trust Limited is incorporated in The Bahamas with limited liability. It is a bank and trust company that is licensed in accordance with the Banks and Trust Companies’ Regulation Act and is regulated by the Central Bank of The Bahamas. Additionally, Pictet Bank & Trust Limited is registered with the Securities Commission of The Bahamas as a Broker Dealer II and is approved to (i) Deal in Securities 1. (a) & (c ); (ii) Arrange Deals in securities; (iii) Manage Securities ; (iv) Advise on Securities.Warning: The content of this marketing communication has not been reviewed by any regulatory authority in The Bahamas. You are, therefore, advised to exercise caution when processing the information contained herein. If you are in any doubt about any of the content of this marketing communication, you should obtain independent professional advice.