Endowments have developed resources and expertise in areas they “correctly saw as structurally neglected and inefficient,” he writes in an MLC implemented consulting research paper. Often, such proficiencies have been derived from their heritage. MIT, for instance, first attained real estate expertise by developing land in and around the university campus.

“Herein lies an important lesson,” Abley writes. “Institutions clearly need to research mainstream asset classes, but arguably, by the time an asset class is developed enough to have been categorised, many of the inefficiencies will have gone. Perhaps more enlightened institutions will begin to employ people whose exclusive role is to identify – not managers – but market inefficiencies. Find the inefficiency and then identify or create the strategies to exploit it.”

To build such “uncomfortably idiosyncratic portfolios” a “sustained contrarianism” is required. It involves making decisions that, at the time, are very painful – “usually because you’re virtually the only one doing them”. Yale and Harvard, for example, diversified away from US equities in the mid-90s and missed years of great returns. And in the late 90s, the oil price caved to US$12 a barrel. “At that time the exposure to oil and gas wasn’t an easy one to live with. It is only now it looks obvious.”

The president of the Princeton University Investment Company, Andrew Golden, says the job of running the school endowment requires the team to “optimise discomfort” – to “push us to the limit of doing things that are uncomfortable, because that’s the way you make money, but not so far that we later become so uncomfortable we abandon the plan we started with.”

Abley points out that mainstream funds have not pushed themselves this far because this type of bahaviour is, in many ways, ‘uninstitutional’. “The optimal level of ‘discomfort’ varies widely between fiduciaries and it is important to understand this. It is much better to be realistic than idealistic,” he writes.

With their track record of having accessed infrastructure early, Australia’s own industry funds can claim a similar aptitude for finding promising investment themes in their infancy.

Secrets reveals three common governance features among the top endowments. First, they maintain an active investment committee, whose members are usually drawn from alumni, that are involved not in micromanagement of the investment staff but in setting strategy. Second, their investment teams have often worked together previously, so this shared experiences helps them grapple with problems and resolve differences of opinion. Third, their academic orientation promotes regular self-evaluation of their structure, processes, people and direction.

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