Endowments Dish on Biggest Fears

Paul Ramer forwarded you an article from fundfire.com

Message note: Emerging trends among endowment investors …the endowment is targeting emerging markets and fixed income. “[We’re] overweighting and underweighting different asset classes [on an opportunistic basis]. [As for] what I see as more attractive today, we’ve had a good run in non-agency mortgages and I think that will continue for some time. Moving forward, we like emerging debt and emerging market equity.” As for the other side, Wynkoop is not a big fan of hedge funds. “We’ve been very disappointed with this asset class for the last several years,” he said. “We are materially below our target, for a variety of reasons, [and] the turnover of our manager roster has increased.” Although UF counts hedge funds as a separate asset class right now, Wynkoop said they may change that up if the endowment chooses to allocate assets according to a risk factor model, looking more closely at the risks of an investment rather than which asset class it sits in. Wynkoop says this approach “makes a lot of sense.” …Ulozas said that the endowment is currently moving more heavily into illiquid assets and has a relatively high risk tolerance, but that it is able to do so because it has “immunized [its] spend.” “What we’ve done is taken our fixed income and structured [it] to pay for our annual spend every year… so we can build out the rest of our portfolio [for growth],” said Ulozas. “So we have a higher risk tolerance, but we’ve done that by making sure our base is very secure.” …Wynkoop also says that UF is positioned well whenever inflation does take off. “It’s something that’s on the horizon,” he said. “We have a portion of our fixed income portfolio in TIPS … our other asset classes [like commodities and energy also] offer some degree of inflation protection.”

View this article below on our website.
Endowments Dish on Biggest Fears

Endowments Dish on Biggest Fears

Article published on March 19, 2013
By Billy Nauman

Given recent volatility and low expectations for returns, making enough money to cover the annual spending requirements of a university endowment can be easier said than done. Last year even Yale University’s endowment, which returned more than 4% on its investments, still finished the year with lower funds following withdrawals by its parent institution. So how are these investors coping? What strategies are they employing to ensure that enough money comes in?

Doug Wynkoop, CIO at the University of Florida, and Cathy Ulozas, CIO of Drexel University, discussed this issue at length – as well as other challenges, like looming inflation – at Information Management Network’s Foundations and Endowments Summit in Huntington Beach, Calif.

“[Meeting return objectives in this low return environment] is our biggest challenge,” said Wynkoop. “When I map out capital market assumptions for this year I don’t get to my real five percent spending rate objective.”

To compensate, Wynkoop says that UF is investing opportunistically in the hopes that active management and asset allocation can make up the shortfall. Specifically, the endowment is targeting emerging markets and fixed income. “[We’re] overweighting and underweighting different asset classes [on an opportunistic basis]. [As for] what I see as more attractive today, we’ve had a good run in non-agency mortgages and I think that will continue for some time. Moving forward, we like emerging debt and emerging market equity.”

As for the other side, Wynkoop is not a big fan of hedge funds. “We’ve been very disappointed with this asset class for the last several years,” he said. “We are materially below our target, for a variety of reasons, [and] the turnover of our manager roster has increased.”

Although UF counts hedge funds as a separate asset class right now, Wynkoop said they may change that up if the endowment chooses to allocate assets according to a risk factor model, looking more closely at the risks of an investment rather than which asset class it sits in. Wynkoop says this approach “makes a lot of sense.”

Drexel does not rely as heavily on its endowment as UF and many other universities, but that does not mean the investment office doesn’t have to worry about its spending. Ulozas said that the endowment is currently moving more heavily into illiquid assets and has a relatively high risk tolerance, but that it is able to do so because it has “immunized [its] spend.”

“What we’ve done is taken our fixed income and structured [it] to pay for our annual spend every year… so we can build out the rest of our portfolio [for growth],” said Ulozas. “So we have a higher risk tolerance, but we’ve done that by making sure our base is very secure.”

Both CIOs are also concerned about inflation, but neither sees it as an immediately pressing issue. “We see [inflation] down the road, but it’s not a new concept,” said Ulozas. “We know it’s there and we know the assets will react with it, so I think we’ve already taken that into account.”

Wynkoop also says that UF is positioned well whenever inflation does take off. “It’s something that’s on the horizon,” he said. “We have a portion of our fixed income portfolio in TIPS … our other asset classes [like commodities and energy also] offer some degree of inflation protection.”

Climate change, however, is not on their radar. An audience member asked Ulozas and Wynkoop directly whether they viewed ESG investment as a return driver or if they were trying to mitigate risk specifically from climate change. Ulozas explained that impact investing “doesn’t fit well for us given our size or risk tolerance,” and Wynkoop declined to answer altogether. When prioritizing returns over ESG considerations, however, Florida and Drexel remain in good company. Even Harvard University, which is recruiting for a vice president of sustainable investing, is not giving up on fossil fuel investments just yet.

For more articles like this one, go to fundfire.com . FundFire is an information service of Money-Media, a Financial Times company.

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