Endowments, Foundations Increase OCIO Use, but Underutilize Alts

Endowments and foundations are too light on alternative investments, increasingly use outsourced CIOs and have cooled off a bit on environmental, social and governance issues, among the findings of a recent survey from CAPTRUST Financial Advisors.

According to a report of the CAPTRUST Endowments and Foundations Survey’s findings, alternative investments are an “untapped opportunity,” with 39% of respondents not currently allocating to the asset class. Among those organizations, liquidity concerns and complexity were the top two reasons given for not investing in alts, while 10% said they simply do not see any potential benefit.

The survey also found a steady rise in the number of organizations hiring an OCIO, reported by 33% of endowments and foundations, up from 28% in 2021 and 24% in 2020.

“We are seeing more organizations utilize a hybrid investment management approach, which enables an asset owner to delegate responsibility for all or part of their investment portfolio to a full-time investment advisor,” Grant Verhaeghe, endowment and foundation practice leader at CAPTRUST, said in a release. “Especially given the amount of market volatility in recent years, we expect more and more organizations to explore outsourcing their investment responsibilities.”

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However, the report also said most endowments and foundations continue to manage their investment assets either in-house or with the help of an investment consultant, despite the growth of discretionary management engagements.

Adoption of ESG investing fell slightly in 2022, continuing a multiyear trend among most asset classes, the research found. However, when the research is broken out by asset class, ESG-related investment adoption rates vary significantly. For example, the percentage of organizations adopting fixed-income ESG strategies plummeted to 49% in 2022 from 79% in 2020 and 65% in 2021, while domestic equity ESG adoption has only seen a modest decline of 6% in that time. Meanwhile alts are bucking this trend, with their ESG use surging 15 percentage points last year alone.

Not surprisingly, the report also found that “organizations that have not adopted ESG maintain a different worldview from those that have,” adding that these organizations believe ESG will detract from performance and are less likely to have discussed allocating to ESG in the past 12 months.

Additionally, the report found that approximately two-thirds of organizations surveyed prioritize diversity, equity and inclusion. Of these organizations, 82% said incorporating DEI practices is making their organizations more effective.

“This year’s survey data shows the vast majority of organizations are satisfied with their current level of DEI focus and believe DEI is increasing their effectiveness,” James Stenstrom, endowment and foundation director at CAPTRUST, said in a release. “Across the sector, DEI implementation is taking many forms, but boards are still struggling to find, attract, and recruit diverse members.”