In recent years, the “endowment model” of investing has been seen as the “gold standard” of institutional investment practice. In practice, few institutional allocators have the resources and access required to invest in the same way as the largest university endowments. Moreover, in recent years, the investment returns that the leading endowments have achieved are not much higher than outcomes available from much simpler, liquid, and transparent portfolios, leading some to question whether the ongoing surge of assets toward this investment style is impairing its potency. At Atlas, we believe that we can generate returns competitive to endowment model outcomes with a much more cost-effective, liquid, and understandable investment strategy.
The “endowment model” philosophy boils down to these primary characteristics
- Heavy reliance on two return sources: equity beta and illiquidity
- Strong focus on external manager access and selection
The success of early adopters such as Yale has generated many copycats! Yale University has earned an enviable annual return of 13%+ since 1985. In contrast, the average/median institutions’ return is closer to 70/30 simple stock/bond portfolio. In fact, in the ten years through 2020, a simple index portfolio with 70% in global equities and 30% in US core fixed income would have had a higher return than three-fourths of the university endowments which report to NACUBO.
A key drawback of the endowment model is the large proportion of assets in illiquid investments limits flexibility to manage the asset allocation. Atas Capital believes that asset allocation remains the most promising underexploited approach to improve portfolio outcomes. Innovations such as ETFs and increasing granularity of available index funds make implementation of a flexible effective allocation strategy more cost-effective than even a decade ago.
Our asset allocation decisions are based upon the most widely researched factors:
- Value: Is the relationship of price to underlying fundamental information favorable? In other words, what investment return is reasonable to expect given the price being paid?
- Risk: How much risk of loss does this asset present?
- Sentiment: Has the price been rising?
Further, we evaluate these characteristics in two ways:
- Relative: Within the same asset class – for instance comparing value of US equities to Emerging Market equities
- Absolute: An asset relative to its own history – for instance comparing the current P/E ratio of US equities to the prior distribution of P/E ratios for US equities
In addition, At Atlas, we maintain an extensive database of global economic information. This knowledge of where we are in the economic cycle also informs our allocation choices. For more information, please refer to Markets and the Economy.