A university, in contrast, can’t leave its endowment -but it can fire the investment team. In searching for attractive alternative assets, both endowments and pension funds encounter limits on the resources available to aggressively scour markets for opportunities. Here, Kennedy says, the challenge is to deploy internal and external resources for the purpose of exploiting strong competencies. “The key is not to always be looking for niche investments, but to understand what your key competitive advantage is and focus on this far more than what competitors are doing. And if you don’t have the resources in-house to exploit it, you have to reach out,” Kennedy says.

“It comes down to aligning good governance with explicit policies aimed at achieving explicit objectives, and the discipline to implement these through asset allocation and resource allocation decisions to exploit your competitive advantage. What’s hard is getting a group of people to implement this in a disciplined way. “You don’t need a board or a committee of investment professionals per se, but you do need people who understand how to make informed decisions on the basis of incomplete information, because we never have enough information going forward.”

Such a governance structure and culture requires dedicated groundwork. “You need to create the governance structure and manage the expectations of stakeholders, and clarify the objectives first,” Abley says. “You need to create that culture in the institutional mindset, and to do that is a multi-year task. It’s kind of embedded in the DNA of Yale and Harvard.” Ideally, this culture would be sustainable, too. Writing in Endowment Management, Kennedy asserts that “the best governance structure is an empty shell unless populated by knowledgeable people capable of making sound decisions.”

He recommends that at least some investment committee members have professional institutional experience, but not to over-specialise: too many investment professionals with similar backgrounds “may lead to deleterious group-think”.

Representatives of stakeholders in the fund, such as those representing employee members of a super fund or from the university board – should be included. Specialised investment knowledge should not be considered a qualifier for entry. Also, “neither eminence nor expertise are sufficient to compensate for a failure to participate in meetings”. The best committee members are open-minded, act quickly to fix problems, ask appropriate questions, and are accustomed to making decisions, Kennedy continues. The very worst are overconfident, successful, ‘can-do’ individuals who are impatient with developing a consensus and believe that any lack of knowledge they have should not impede how they manage the fund portfolio. While staff turnover does not usually carry positive implications, and some endowments have benefited from the decades-long tenures of investment committee members, there are just as many examples of “sclerosis endured by institutions that have failed to inject new blood into their committees,” Kennedy writes.

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