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Endowment Debate Heats Up as Dennis Hammond Calls a Critic’s Findings ‘Potentially Dangerous’

The battle of endowment studies rages on.

Dennis Hammond, who published research in August arguing that the average endowment has underperformed a simple portfolio of stocks and bonds, has fired back at the author of a new paper rebutting his research.

Hossein Kazemi — a professor of finance at Isenberg School at the University of Massachusetts Amherst and a senior advisor to the CAIA Association — argued in a paper jointly produced with CAIA that previous studies showing that endowments have been beaten by a plain vanilla portfolio of stocks and bonds used improper U.S. benchmarks to reach their conclusions and don’t account for cash in the portfolio. 

The Isenberg/CAIA paper addressed Hammond’s research, published in the Journal of Investing in August. Hammond found that over 58 years the average endowment underperformed by 1 percent annually, echoing similar findings by Richard Ennis, retired chairman of consultant EnnisKnupp. Kazemi argued that endowments have handily beat what he thinks is a more appropriate benchmark, a passive global portfolio made up of 60 percent stocks and 40 percent bonds.


But Hammond, who spent 25 years as CEO and founder of Hammond Associates Institutional Fund Consultants, contends that his critics have reached different conclusions because they’re using an irrelevant benchmark. 

In an interview with Institutional Investor, Hammond added that the latest research is “potentially dangerous” because it leaves endowments with the false hope that alternative investments will save their portfolios. Hammond, who sold Hammond Associates in 2011, is now head of institutional investments at Veriti Management, an asset manager focused on sustainable investments. 

“Dr. Kazemi wants to confuse the issue by replacing the traditional 60-40 portfolio with this construct he made up, which is global index, and which bears no relationship to any benchmark any endowment uses,” he said. Hammond argued that the U.S. 60-40 benchmark has been used by endowments since the late 1960s.

Ennis said he agrees that Hammond’s benchmark is too simple and ignores important areas of investment. But he said Kazemi’s proxy is purely hypothetical and unrealistic. 

“He’s taking a simplistic textbook concept. But there isn’t one big world market,” said Ennis. In his own research, Ennis used data from the National Association of College and University Business Officers (NACUBO) to construct a benchmark that reflects exactly how endowments have invested.

“There isn’t any other version of 60-40,” Hammond said. He pointed out that the global index used by Kazemi consists of 60 percent in MSCI World and 40 percent in the Bloomberg-Barclays global Aggregate index. The Bloomberg-Barclays index has 25 percent in non-U.S. bonds. The highest allocation endowments have had to non-U.S. bonds since records were kept is less than 3 percent, he argued.

“The question is, how have endowments fared against this naïve mix [60-40] as they began to diversify away from it? In other words, did the diversification help or hurt, and if the impacts were diverse, whom did it help, and whom did it hurt?” Hammond said.

Reached on Thursday, Kazemi responded that the correct benchmark is the one determined by an endowment's investment committee. But that's not known.

“We're all second guessing here,” he said.

But using a global benchmark is not irrelevant considering that in 2000, when endowments were moving to incorporate more alternatives, everybody was talking about international diversification, he argued. Global stocks were beating U.S. stocks at the time, he explained.

“Using a global benchmark is quite a reasonable assumption. But my point here is that changing an input or dropping some data in these studies will give you very different results. The management of trillions of dollars in endowments shouldn't be determined by one study,” he said.

Kazemi said he has long been critical of endowments' investment strategy. In 2017, he published research in CAIA's own journal showing that from 2000 to 2015, the median endowment returned 5.99 percent annually. A global 60-40 portfolio and a multi-asset portfolio of exchange-traded funds beat those results, returning 7.13 percent and 8.11 percent, respectively.

“What is the point of assuming significant illiquidity risk while spending significant amounts of resources to manage these pools of assets, when over the past 15 years their performance has matched those that can be earned by simple allocations to ETFs?” he wrote at the time. 

The story is different for the largest endowments, which get access to top private markets funds, according to Hammond. Over the past 15 years, for example, the large endowments earned 13.1 percent annually in private equity, he said. The average smaller endowment earned 8.6 percent.

But most importantly, said Hammond, the average endowment also underperformed both its annual return need and its long-term return goal over the 58 year period he studied by 160 basis points (1.6 percent) and 210 points, respectively. 

“What that means is if it wasn’t for the fact that they get new gifts, they’d go out of business,” he said.

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