Endowments and Foundations Balance Returns and Risk Management, Liquidity

A new Pyramis Pulse survey shows that endowments and foundations, often lumped together for the sake of simplicity, increasingly are turning to different asset allocations and risk management procedures to protect themselves from the dreaded fat tail.

(November 25, 2009) – Endowments and foundations, often grouped together, are, in fact, facing different problems and risk exposures, according to a recent survey.

According to the Pyramis Pulse Survey—conducted in conjunction with Asset International, ai5000’s parent company—29% of endowments ranked low investment returns as their most pressing concern at the moment; foundations, on the other hand, ranked the ability to fund their operating budgets as the most worrying factor at the moment. That is by no means the only divergence, however: 32% of endowments feel that their portfolio is riskier than it was five years ago, while 46% of foundations have, in fact, reduced their risk exposure over the same time frame.

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While they have differing issues, both endowments and foundations are turning to their asset allocations in hopes of a solution. Both types of investors, the study shows, are hoping to diversify into emerging markets (with 42% saying they will do so), global equities (32%), commodities (29%), inflation-protected Treasury bills (28%), real estate (25%), and private equity (20%). Overall, the study found that endowments were more likely then foundations to chase the risk premium theoretically found in alternative asset classes, and that foundations—if they did enter into such investment vehicles—were more likely to use aggregating structures such as hedge funds-of-funds to gain exposure.

Alongside asset allocation changes, foundations and endowments also expressed a willingness to change risk management procedures. While the number of respondents who lacked confidence in their ability to measure risk accurately rose from the 2006 version of this survey, 58% of endowments are hoping to combat this through additional liquidity testing. Foundations, on the other hand, are more likely to require transparency from their managers. Only 29% have not made changes to their risk management procedures following 2008.

The study polled 109 respondents (58 foundations, 51 endowments) in early October.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>