OBSERVATIONS | A FOCUS ON ENDOWMENT-STYLE INVESTING

In recent years, there have been considerable changes in how portfolios are constructed, with many investors implementing larger allocations to alternative assets, a strategy that was pioneered by endowment-type investors. In this article, we outline our approach to endowment-style investing, we look at available research, which examines the performance of endowment funds, and analyse the portfolios of ultra-high-net-worth investors and endowments, which do not have the kind of constraints typically applied to most portfolios.


  • Over time, we have seen considerable changes in the make-up of portfolios as investors have moved beyond typical stock and bond portfolios and introduced alternative assets, such as hedge funds, private markets, direct property and infrastructure. The allocation to alternatives, however, still differs materially between investor types, with the allocation typically increasing as the investment pool increases.
  • Endowment funds now have a long track record of investing with high allocations to alternative assets, and various studies have found that increased allocations to alternatives have delivered superior risk-adjusted returns, outperforming traditional asset allocated portfolios. Our analysis has also identified that endowment-type asset allocations tend to have a reduced home country bias within the equity component of their portfolios. This is because these investors are able to focus on maximising returns, rather than matching liabilities in their domestic currency.
  • In the case of a growth investor, where the typical cap on alternatives is 20%, our analysis shows that when constraints are eased, the portfolio’s allocation to alternatives might move towards 40-50%. This is an uncomfortable level for most investors in what is a comparatively illiquid asset class. However, for investors who have the scale, long-term investment horizon and lack of liquidity requirements, it makes sense to implement an asset allocation that can take advantage of a lack of constraints.