More university endowments are shifting funds away from traditional markets to alternatives in search of higher returns to manage inflation and meet the rising costs of operating university campuses, said investment experts familiar with this group of asset owners.
A STRATEGIC SHIFT
University endowments have been allocating more budget to alternative assets in recent years, according to a senior Asian university endowment executive.
With global inflation and interest rates on the rise, the executive, speaking anonymously to AsianInvestor, expects the shifting of endowment investments away from equities and bonds, roiled by market volatility, to private equity and real assets to be sustained.
“Investing in traditional assets like stocks and fixed income are becoming more challenging. Moving into alternatives can give you better risk-adjusted returns,” he said.
“Unlike insurance funds, endowments are not constrained by capital charge, hence they are able to take a long-term investment horizon and higher risks in return for higher expected returns,” he added.
That being said, not all endowments are equal. “If you’re small, you can’t do much. Your mandate is dependent on the governing committee’s restrictions,” he said, referring to the board of independent trustees that are normally appointed by the university bodies to oversee the strategic direction of the endowment.
Generally, the larger, established endowments follow the Yale model, which emphasises diversification and taking a long-term investment view in their investment strategy, he said.
Endowments that adopt such a model typically have a wider risk spectrum that is compatible with the risk profile of alternative assets, said Prabhat Ojha, managing director and head of Asia client business, at Cambridge Associates.
“When customising investment portfolios for our endowment clients, we aim to build broadly diversified portfolios with significant allocation in alternatives based on their risk/return profile. For instance, the average private equity or venture capital allocation is 30%, hedge fund allocation is 15%, and private real assets allocation is 8%,” he told AsianInvestor.
A March 2022 study on US-based endowments by Pictet Wealth Management corroborates the trend toward alternative investing.
“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,” Jacques Henry, Pictet’s team leader for cross assets allocation and macroeconomic research, told AsianInvestor.
The rising costs of operating universities is another driver behind the increase in endowment allocations to potentially higher return alternatives. One of the main objectives of a university endowment fund is to generate income from the donations and gifts it receives to finance a portion of the university’s operating expenses.
“Most of our US and Asian endowment clients think from an intergenerational perspective, looking at how to balance between current spending needs and the needs of future generations,” said Ojha.
While endowments generally contribute 5-20% of the annual operating budget of their respective universities, there are others like Harvard which contributes more than one-third of the university's annual operating budget.
With operating costs expected to rise in tandem with high inflation, many endowment managers are bracing themselves for more challenging long-term targets in the coming years.
EYE ON ASIA
With the investment landscape in the US and Europe challenged by uncertainties from geopolitical risks and stagflation concerns, there is speculation that some western endowments might be looking actively to Asia for opportunities.
A recent report by Deal Street Asia, quoting unnamed sources, said that Harvard Management Company, the endowment arm of Harvard University, is planning to set up an office in Singapore to expand its interests into Asia.
When contacted by AsianInvestor, the Harvard University endowment, which has $53.2 billion in assets under management (AUM), declined to comment.
Janus Henderson Investors
Andrew Hendry, head of distribution in Asia (ex-Japan) at Janus Henderson Investors, said western asset owners are generally interested in India and China as the Asian markets with the most potential.
“For endowments, they may have interest in either investing in regional hedge managers or indeed managing their own regional portfolio, depending on their resources and investment philosophy,” he told AsianInvestor.
While he is unable to verify the report about Harvard setting up shop in Singapore, he believed that foreign university endowments such as the likes of Harvard or Yale moving to Asia are a positive development for the region.
“It is positive, as a larger ecosystem of endowments benefits each member. Their sizes are not like sovereign wealth funds, where there can be negative externalities of being in the same asset class or investing with the same managers,” he said.
Cambridge Associates’ Ojha concurs. “Other long-term investors like family offices and pensions have been setting up offices in Asia for a few years now. If more foreign endowments were to set up shop in Asia, it will add to the richness of investment professionals in the region, but also make it more competitive to hire and retain talent.”