Public or Private? That’s Why Allocators’ Returns Are all Over the Map

The dispersion between big and small endowments has been wider in the last three fiscal years than it was for any other historical period since the peak of the technology bubble in 2000.


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The gap in investment returns between the largest institutions and smaller allocators has rarely been this wide.

According to industry watchers, a year ago large institutions that use the endowment model outperformed smaller peers, whose portfolios were tilted toward the public markets. But that reversed in fiscal 2023.

“This was a fiscal year where there was a fair amount of dispersion within the endowments and foundation universe,” said Margaret Chen, head of the global endowment and foundation practice at Cambridge Associates. She added that the size of the portfolio also influenced returns. The wide gap came down to one big asset allocation choice.

According to Chen and other consultants who spoke with Institutional Investor, the amount of exposure to private equity, including venture capital, real estate, and private credit, was a major factor in whether institutions ended the year in the red — or the black.

Private investments drove positive returns for institutions in 2022 and especially 2021. This year, though, the opposite was true. Performance was driven by exposure to public markets, particularly to the so-called Magnificent Seven stocks, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Smaller institutions and some pension funds typically have a larger allocation to public markets compared to larger endowments, which tend to employ the private-markets-heavy Swensen Model.

Meketa consultant Laura Wirick said she noticed that public pension clients were doing well this year compared to their large Ivy League endowment peers. A lot of that had to do with pensions’ bond holdings. “In 2022 a lot of endowments and foundations tended to have less fixed income than pension funds, which was a super positive thing for them,” during a year when bonds were pummeled. But bonds bounced back in 2023, and endowments and foundations generated lower returns than pension funds and the typical 60-40 type portfolio.

According to Chen, this shows in the numbers. Between 2001 and 2020, the dispersion between the median return of small and large endowments was 130 basis points on average. For fiscal year 2023, the dispersion is 320 basis points — and that might widen when final private markets performance numbers come in.

“The dispersion between big and small endowments has been wider the last three fiscal years than it was for any other historical period since the peak of the dot-com bubble in 2000,” Chen said.

Looking ahead, consultants predict that fiscal year 2024 will bring more uncertainty to allocators. According to Jay Kloepfer, executive vice president and the director of Callan’s Capital Markets Research group, the investment industry has struggled to predict how inflation and interest rates will affect the markets — and the likelihood of a recession.

“One of the interesting things in the background for our clients is [the industry’s] complete inability to capture what’s gone on in the U.S. economy,” he said. “A year ago, we were all calling for a recession.” It hasn’t come to fruition yet.

According to Chen, there will be some “hard asset allocation decisions to make” in 2024, including how much growth, cash, fixed income, and hedging to add to the portfolio. “These are not easy questions because you have to balance the growth or capital preservation element,” she said.