Chief Investment Officers: Endowment Model, Risk Parity to Outperform 60/40

(September 6, 2011) – American institutional investors expect the endowment model and risk parity investment strategies to outperform a traditional 60/40 portfolio going forward, new research shows. 

According to aiCIO’s first annual Risk Parity Survey, 41.9% of the 109 chief investment officers (CIOs) polled expect the endowment model – which relies on heavy use of external alternative managers – to most outperform 60/40 portfolios over the next 10 years, measured via risk-adjusted returns benchmarked to 60/40 portfolio risk. Risk parity strategies – which rely on constructing a risk-balanced portfolio with a heavy use of fixed-income products – are expected to most outperform that same benchmark by 37.8% of respondents. 

Further analysis shows corporate pension plan CIOs to be the most likely to favor risk parity strategies, with 45% suggesting that the strategy will perform the best of the three asset allocation theories over the 10-year timeframe. Public pension funds also predict the most outperformance will come from risk parity strategies (40%), compared to the endowment model (32%) and the 60/40 model (28%). 

Perhaps unsurprisingly, endowments and foundations predict the best results for the endowment model (60%), compared to the risk parity approach (32%) and the 60/40 investment approach (8%). 

Breaking down the data by size, America’s largest plans – those with over $5 billion in assets – believe risk parity will outperform the benchmark the most (43.3%), followed by the endowment model (30%). Conversely, smaller plans – those under $1 billion in assets, and those between $1 billion and $5 billion – predict victory for the endowment model, at 47.6% and 52.2% respectively. 

Perhaps surprisingly, considering its dominance over the investment world for so long, the 60/40 model was predicted to come last in risk-adjusted returns over a 10-year horizon by all silos of asset owners polled – corporate funds, public funds, E&Fs, small plans, medium plans, and large plans. 

For a look at the complete survey results, click here.