Traditional Portfolios Won’t Cut It Anymore, Endowments and Foundations Say

Most endowments and foundations believe that a traditional portfolio of stocks and bonds will not meet their return requirements, new data shows.  

According to results from a TIFF Investment Management survey, only 10 percent of its respondents — all TIFF clients — said they expected a passive portfolio with a 65 percent allocation to stocks and 35 percent allocation to bonds to exceed their return hurdles.  

TIFF, the nonprofit outsourced-CIO provider that manages $7 billion in assets, is expected to published the survey results on Wednesday with details on how its more than 100 clients view the market.  

Although most respondents said that the economic conditions created by the Covid-19 pandemic haven’t affected the long-term health of their organizations, the surveyed investors were not optimistic about how the markets are shaping up.

Over the next ten years, 41 percent of respondents said they believed equities will fare worse than they did the previous decade. Fifty percent of respondents said the same about bonds. Very few expected the asset classes to outperform the previous decade, with only 8 percent anticipating that equities will outperform, and 5 percent predicting that bonds will.  

Meanwhile, over a quarter of the respondents said they expect their institutions to increase spending in 2021, the survey showed.  

Endowments and foundations “are spending more in the middle of a pandemic and they’re going to do it for the next three to five years,” said Kane Brenan, chief executive officer at TIFF, via Zoom Tuesday. “At the same time, they’re saying the returns are going to be lower.” 

Endowments and foundations are usually tasked with ensuring their returns are at “CPI +5,” or the consumer price index plus five percent. Lower returns mean they miss targets — and can’t spend as much on grants, scholarships, and other nonprofit work. 

So what’s a CIO to do? According to TIFF, one solution may be active management. The OCIO provider’s Comprehensive Endowment Strategy Composite, which includes active strategies, outperformed its benchmark by 3.8 percent in the first 11 months of 2020, a TIFF spokesperson told Institutional Investor in December. The benchmark passive index includes a 65 percent allocation to the MSCI All Country World Index and a 35 percent allocation to the Bloomberg Barclays US Aggregate Bond Index.

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“There have been a number of publications asking, ‘Is active management dead?’” Jessica Portis, the new head of portfolio management and services at TIFF, said via Zoom. “I do think that the trend is changing a little bit as a result of some of the conditions we saw in 2020.” 

The TIFF survey respondents were more optimistic about private equity and hedge funds than they were about stocks and bonds. Just five percent said they expect hedge funds to perform worse in this decade than in the last, and 17 percent said the same of private equity.  

“The thought there is that there are a lot of global changes that are happening right now,” Brenan said. He pointed to not only the pandemic, but changing governments within the United States and abroad and the evolution of China’s economy as factors that will increase the market’s volatility — and prime hedge funds for strong performance. 

“With that increased volatility and dispersion, hedge funds which are set up distinctly to find alpha, are more attractive,” Brenan said. “People are confident or hopeful that they’ll do better in the next 10 years than in the past.” 

TIFF is also working on a fixed income investment replacement, as interest rates are low, and the negative correlation once offered by the asset class is ineffective in Brenan’s eyes.  

“In the overall portfolio, the biggest issue that all people are grappling with what is going to perform the functions that fixed income used to perform,” Brenan said.  

He added that TIFF has swapped some of its fixed-income investments in favor of low-risk absolute-return investment strategies. For other fixed-income investments, the firm has shortened the duration. TIFF is also exploring how to add more negatively correlated assets to its portfolio, Brenan said.