The Endowment Model Example – Princeton University (US)
The recent update from Princeton on their US$36bn endowment was a timely reminder of where family offices and wealth managers can learn from these long term, opportunistic portfolios.
Strategic Asset Allocation
Endowment: “SAA is the attempt to balance the relative merits of equities versus fixed income, domestic versus foreign investments, and publicly traded versus non-marketable assets.”
“The long-term asset allocation decisions are embodied by a Policy Portfolio that describes the asset categories in which Princeton will invest, a set of target weights that indicate how the portfolio will be positioned in “normal” market conditions, and a range of weightings within which exposures can be adjusted mid-term in response to significant market disequilibria or other unusual circumstances.”
For Families, this is a great start to the discussion of strategic, long term allocations vs shorter term tactical bets. But as they point out – they must sit within the pre-determined bands.
Review and SAA Changes
“Princo historically reviewed the Policy Portfolio annually. However, given the typical and anticipated frequency of changes to the Policy Portfolio, several years ago we moved to a regime where we will generally review it biannually unless there is a compelling reason to do so more frequently.”
They also note that there have been material changes in asset targets, one being Private Equity and Real Assets which have targets that have doubled.
They provide some interesting rationale for managing the portfolio:
1) Active Managers in certain markets – “Relative to the U.S., international markets tend to be less efficient, providing meaningful opportunities to add value through active management.”
2) Manager Selection – “an emphasis on “foreign local” managers. These managers are based outside the U.S. and invest locally in their respective geographies.”
3) Implementation – “In implementing the new positioning, we utilized U.S. equity market index shorts (primarily focusing on NASDAQ futures). Using index shorts enabled us to quickly and efficiently hedge (albeit quite imperfectly) exposures within Private Equity and to increase FIC exposure.”
4) Rebalancing difficulties in illiquid or lock ups – “Since that time, we have reduced our commitment pace to a sustainable steady-state rate and expect to glide gradually over multiple years back to the target allocation. Indeed, this decline would be happening at a faster pace if not for the second factor—the asset category’s very strong performance.
5) Diversity of staff – “While we have made efforts to improve diversity for more than 15 years, progress has been painfully slow for much of this period. As a result, about five years ago, we initiated different approaches to redouble our work.”
One of the main reasons I like this update is to get insights into how long term capital allocators determine if they are doing their job and how they compare themselves to other endowments.
“Notably, our performance in fiscal 2022 compares well to that of other college and university endowments, for which the median return was a loss of 6.5 percent, and the breakpoint for top-quartile results was a loss of 3.1 percent.”
It’s also worth noting their asset class benchmarks for families looking to build them into their reporting structure:
And how “Examining performance over rolling periods enables an additional long-term perspective.” The below chart provides 10 and 20 year rolling return under/outperformance.
And in keeping with the long term nature of their management style, there is not illusion of knowing the future. Only that: “..the beauty of our system is its robustness and resilience. It works fine when we very appropriately and accurately admit, which we do much more often than not, that we do not really know what lies ahead.”
Download the full update here
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