How is investing for an endowment different

[zizou]

Just wondering how one would think differently if investing for an endowment? I understand no taxes and infinite time horizon provide for greater risk taking ability

I imagine majority would be invested in Equities? Assuming a significant percentage of the university expenses are likely covered from tuitions etc

Can somebody weigh in? What are the different things to consider?

 

 

 

[Ham Hockers]

Just wondering how one would think differently if investing for an endowment? I understand no taxes and infinite time horizon provide for greater risk taking ability

I imagine majority would be invested in Equities? Assuming a significant percentage of the university expenses are likely covered from tuitions etc

Can somebody weigh in? What are the different things to consider?

 

Read Swensen. That's the playbook, nowadays.

[jawn619]

When it comes to investing for endowments, and generally as you get bigger in size, your options become more limited and the range of your performance gets more narrow. For example, people like Ray Dalio and Swensen who manage 25+ billion in assets have to focus more on asset class allocation rather than individual stocks. Beating the market by a few percentage points is probably the top end of what they can do. If you're a Joe Schmo like a lot of us on these forums, we can see a lot more variability in our returns, and I think that's a huge advantage. Buffett had years earlier on in Berkshires history where he had +70% yearly returns. Now that kind of performance is close to impossible. 

[benhacker]

When it comes to investing for endowments, and generally as you get bigger in size, your options become more limited and the range of your performance gets more narrow. For example, people like Ray Dalio and Swensen who manage 25+ billion in assets have to focus more on asset class allocation rather than individual stocks. Beating the market by a few percentage points is probably the top end of what they can do. If you're a Joe Schmo like a lot of us on these forums, we can see a lot more variability in our returns, and I think that's a huge advantage. Buffett had years earlier on in Berkshires history where he had +70% yearly returns. Now that kind of performance is close to impossible. 

 

I think when someone says "endowment" it generally means to me a pool of money that is used to pay out a large % of it's assets each year in benefits, like 5%.  Regardless of size then, I would suggest that endowment investing absolutely must care about volatility, because when you need to spend 5% of your bankroll, volatility = risk.

 

Those of us building a nest egg to be used in 30 years don't give a shit about vol, but I think volatility is definitely a major risk for any distribution based pool of capital.

 

I would agree Jawn that managing $25B also changes the game, but the vol component is more because of withdrawal rates, not size.

[BG2008]

Most charitable organization have mandatory 5% redemption each year for tax reasons.  This introduces an interesting dynamic where if the endowment is down 30% in a given year, then you have to distribute 5% on top of it.  Volatility becomes a big issue in that situation.  Interest rates is very important.  Having sit in a few investment committee meetings for a tiny endowment that I'm personally involved with, it's apparent that 1) decision making is done by committee 2) There's a lot of CYA from a legal perspective (does the by-law/mission statement specifically state whether we can allocate X% to bonds/equity/alts etc  3) As interest rate has fallen, reinvestment risk goes up.  There was a meeting where people asked the question "do we need to go out the risk curve in order to earn a higher yield".  It's interesting to see how risk takings gets ramped up on a wholesale level when interest rates is reduced.  If we were asking those questions, then other endowments must be having the same discussion.  We decided as a group that we are not going to chase yield.  But those 6% 10 year treasuries from a decade ago surely do look mighty nice.