Active Investing Will Boost Endowment Growth Over Other Institutional Investors, Cerulli Forecasts

A new report projects endowment assets will grow 7.9% over the next five years, compared with 4.7% and 4.2%, respectively, for public and corporate defined benefit plans.



Endowments are expected to have the highest asset growth rate among institutional investors annually over the next five years, thanks in part to a “strong appetite for actively managed strategies,” according to a recent report from Cerulli Associates.

Cerulli forecasts endowment assets will grow 7.9% over the next five years, compared with estimated annual growth of 4.7% for public defined benefit plans and 4.2% for corporate defined benefit plans during the same period.

“The growth in endowment assets can be intriguing for traditional managers looking to expand their institutional footprint,” said Chris Swansey, an associate director at Cerulli, in a statement. “However, managers will have to overcome several challenges to make headway, including increased demand for alternative investments and establishing relationships with hard-to-reach OCIO providers.”

According to the report, based on a survey conducted in the second quarter, “most of endowments’ rapid growth can be linked to their high allocations to alternative investments.” It also noted that 42% of endowments responded they prefer to invest in active strategies in public markets, compared with 23% who reported preferring public defined benefit plans. Along the same lines, 23% of endowments reported a preference for passive strategies in public markets, compared with 33% of defined benefit plans.

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The survey also found that 35% of endowments with more than $100 million in investable assets expect to increase their allocations to developed non-U.S. equities over the next 24 months, while 23% expect to increase their emerging markets equity allocations over the same period.

Meanwhile, most public defined benefit plan respondents indicated they expect to increase allocations to fixed-income asset classes, including investment-grade bonds and municipal bonds, as well as alternative assets, such as private equity, real estate and infrastructure.

“Many plans are looking to add duration to their portfolios in order to lock in long-term yields and exploit any price appreciation that will come with lower rates,” according to Cerulli’s report.

Outsourced CIO providers also strongly prefer active investing, according to the report, with 63% of those surveyed saying their assets are invested in actively managed strategies.

“This can create efficiencies for both asset managers that target large endowments via direct relationships and OCIO providers that manage smaller endowment assets, as they both seek similar products for their traditional asset allocations,” the report stated.

Despite expectations to outperform other institutional investors over the next five years, endowments remain the smallest institutional channel, according to Cerulli.

“While the growth of the assets is promising, the overall size of the channel limits opportunities for asset managers,” the report stated. “Despite this limited opportunity, asset managers still can effectively grow endowment asset market share by creating targeted distribution strategies and offering high-performing products in in-demand asset classes such as non-U.S. equities and investment-grade fixed income.”


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New York State Common Makes Climate Deals With 5 Portfolio Companies

The agreements with five portfolio companies include energy transition reporting disclosures.



The New York State Common Retirement Fund, a $267.7 billion pension fund, announced it reached climate agreements with five portfolio companies during the 2024 proxy season.
 

Southwest Airlines Co. and Cleveland-Cliffs Inc. agreed to set greenhouse gas emissions targets and disclose climate transition plans. The fund made an agreement with utility company WEC Energy Group to disclose a feasibility study on integrating climate metrics into an executive compensation plan. Fast-food giant McDonalds Corp. agreed to assess supply chain water-related risks and set water quality and quantity targets. Reality Income Corp. agreed to adopt a low-carbon transition plan.  

As a part of proxy voting guidelines amended in February, the fund expects all portfolio companies to report climate transition plans and other data related to environmental, social and governance factors. In the 2024 proxy season, the fund has voted against 1,900 directors at more than 600 portfolio companies the fund identified as lacking robust climate risk management. 

“As trustee of the Fund, one of my top priorities is safeguarding the investments made for the benefit of the more than one million participants in the New York State retirement system,” said Thomas DiNapoli, New York state comptroller, in a statement. “To foster long-term financial success, it is essential to address the climate-oriented investment challenges faced by the Fund’s portfolio. Climate change is an increasingly urgent risk facing all investors.” 

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