Endowment Model Has Potential for Compelling Long-Term Returns, NEPC’s Endowment & Foundation Group Research Shows
Small- and Mid-Sized Endowments Better Served by Adopting Hybrid Allocation Model that includes some, but not all components of the Endowment Model
Traditional 60/40 not well Positioned for Future Outperformance
BOSTON--(BUSINESS WIRE)--NEPC, LLC (www.nepc.com), one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations, today debuted its most recent white paper, which takes a critical look at the much-debated Endowment Model.
“The Endowment Model: Striking the Balance between Simple & Complex”
Entitled, “The Endowment Model: Striking the Balance between Simple & Complex,” the paper examines the Model’s viability against the backdrop of a resurgence in popularity of the traditional, liquid 60% equity/40% fixed income portfolio.
Over the last decade, many endowments and foundations implemented what came to be known as the Endowment Model. Many were drawn to this approach because of very successful investment results from some of the top colleges and universities, most famously Yale, Harvard and Stanford. Recent results, however, have caused some endowments and foundations to question the validity of this approach, particularly because the 60 / 40 portfolio has produced results superior to that of the average Endowment Portfolio.
“Higher returns generated by 60/40 portfolios over recent periods have led some endowment and foundation investment committee members to consider the Endowment Model’s long-term viability and whether the traditional allocation split is perhaps a better solution for meeting spending needs,” said NEPC Partner, Scott Perry, who co-authored the paper with analyst, Asher Watson.
“Our research findings underscore our belief that the 60/40 allocation model is, in fact, not well-positioned for future outperformance and that, in many respects, it may put the portfolio at risk.”
One Size Does Not Fit All
NEPC notes that the Endowment Model is not a “one size fits all” strategy and that its implementation may be better suited to resource-rich larger endowments because of the model’s high allocation to illiquid alternative investments. Endowments with assets below $500 million may find the deck stacked against them if they try to implement all pieces of the endowment Model.
NEPC’s research suggests that small and mid-sized endowments seek solutions that fall somewhere on the continuum between the full Endowment Model and the 60/40 split. Ultimately, the ideal structure for most small and mid-sized endowments is a customized approach that incorporates a blend of active and passive strategies and a long-term perspective.
“While the customized portfolio’s 7.1% expected return falls slightly short of the Endowment Model’s forecasted 7.6%, it has all the potential to satisfy the investment program’s return goals if active management is incorporated into the program,” notes Perry. “Conversely, we do not believe a 60/40 portfolio is built to provide returns that align with these goals, since we project a return just slightly over 5% based on NEPC’s forward view.”
For the full white paper, please contact Scott Sunshine/Water & Wall Group at firstname.lastname@example.org.
About NEPC, LLC
NEPC, LLC® is an independent, full service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. It works with institutional investment programs and high net worth clients on both an advisory and discretionary basis.
The Endowment and Foundation Practice Group services 101 endowment and foundation retainer relationships, representing assets of $49 billion, from offices in Atlanta, Boston, Charlotte, Chicago, Detroit, Las Vegas and San Francisco. Learn more at http://www.nepc.com/ and http://www.nepc.com/clients/endowments_foundations.
The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, and do not represent an offer to sell or a solicitation of an offer to buy any security. Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product or strategy of NEPC, LLC (NEPC). The views presented herein represent the good faith views of NEPC as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the adequacy and completeness of such information. Please contact NEPC for current information about our views of the economy and the markets.