Foundations Outsource Investment and Dump Private Equity

(September 27, 2013) — The largest foundations in the US have reduced their allocation to private equity over the past year and many have opted to outsource their investments, research has shown.

Foundations with more than $500 million reduced their allocation to funds offering access to leveraged buyouts, mezzanine debt, M&A, and international private equity from a 27% of their portfolios at the end of 2011 to 22% at the end of last year, Commonfund Institute data showed.

Smaller foundations—with between $101 million and $500 million—reduced their allocations slightly, from 20% to 19%, while the smallest investors retained an 11% stake of their alternative portfolios.

These investments gave foundations some of the worst returns over the year, contributing 7.7%, which lagged US equity returns of 17.5%.

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The overall allocation to alternatives by this group fell from 44% to 42%, but some hedge fund strategies gathered more assets, including market neutral and global macro approaches.

The core elements of these foundations’ portfolios were tweaked by single digits.

The number of foundations reporting that they had outsourced investment functions rose considerably, the Commonfund Institute found. From 30% saying they used a third party to make investment decisions in 2011, some 38% reported the same just 12 months later.

The use of consultants also rose from 76% employing a third party adviser in 2011, to 80% by the end of last year.

Of the largest funds, 72% reported having a CIO in position, but this number fell to 23% when taking the range of foundation sizes into account.

The Commonfund Institute surveyed 140 institutions across the US.

(September 27, 2013) – Trustees are better educated and more willing to listen to new investment ideas than ever before, according to Oxford University professor Gordon Clark.

Speaking to journalists ahead of the Allianz-Oxford Pensions Conference, Clark rebuffed suggestions that the move from traditional asset allocation portfolios to using newer asset classes was being hindered by trustee boards.

“Trustees in the UK in particular have changed dramatically in the past 10 years,” he said. “The average trustee today is very conscious of the liability load.

“They’re younger, smarter, and more skilled today. The push into different asset classes is an obvious response to this.”

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Clark’s view was supported wholeheartedly by Joanne Segars, chief executive of the National Association of Pension Funds.

“There’s much more willingness to look at a broader set of asset classes,” she said. “We’ve seen a lot of trustee interest around assets such as infrastructure.”

Clark also dismissed the idea that trustees as a whole still spent too much time on manager selection: a popular criticism of CIOs who struggle to get more sophisticated investment strategies signed off by the trustee board.

He said: “Everyone used to be in the manager selection game years ago, but today it’s less important. Strategic asset allocation is on the agenda for all.”

The bigger problem trustees had, Clark continued, was the short-term horizon pressures they faced at a time when they should be considering themselves as long-term investors.

“When you talk about strategy and asset allocation, you face questions about the liabilities they’ll face in 80 years alongside questions about the triennial evaluation,” he said.

“Which timeline they should be aiming at can be challenging: the triennial funding evaluation can sometimes get in the way.”

Clark was named as one of aiCIO’s Professors in February this year. The Australian georgraphy specialist arrived at Oxford in 1995, and has published papers on the governance and management of pension funds, the governance and management of sovereign wealth funds, and the behaviour of investors who are saving for retirement.