Tomorrow’s strategies

Effective investing, for endowments and institutions, “is about understanding what you have a competitive advantage in and exploiting that,” Kennedy says. Some endowments now staff teams searching only for new inefficiencies, similar to the way teams are traditionally assigned to specific asset classes, such as global equities or domestic equities. “They have people responsible for the next timberland or the next oil and gas,” Abley says. However the majority of endowments, like many institutions, have only modest numbers of staff, numbering between 10 and 12. Harvard is an exception. It employs more than 100 staff, including a proprietary trading desk, and most are generalists, looking at various asset classes.

Such endowments, particularly those of highly-ranked universities, have another advantage over mainstream funds: their constituents are a source of knowledge. Some universities can deeply analyse certain asset classes because they have research expertise in that area, with resources on campus. Most other funds don’t have these immediate starting points, or can only access them at a higher price. The highly educated constituency of endowments gives them another advantage over most super funds, whose member base of workers are mostly unaware of historical market behaviour and the undulations in performance that are inevitably experienced while investing for the long-term. Instead, they are usually sensitive to short-term results.

“It’s difficult to take a maverick risk if your constituency is relatively uneducated,” Kennedy says. This lack of sophistication takes place in a market where funds compete for members.

In this world of choice and three-year performance figures, “the more difficult challenge is managing money with a really long-term horizon in a peer agnostic way,” Abley says. “Would people really be comfortable underperforming by 7 per cent over four years?”

Where a super fund has thousands of stakeholders, an endowment has one: its university. Unlike most superannuants, it is an extremely astute constituent with many faces. And while a super fund answers to plenty of members, endowment managers must answer to various academic departments and councils, which can also be frightening. “How would you like it if part of your constituency was the economics department of Harvard?” Kennedy asks. Super funds must manage liquidity to meet multiple timeframes, while endowments have a timeframe of forever. As a general rule, endowments must pay out their real rates of return to patron institutions to fund research, curriculum development and other activities.

The investment and capital management division of The University of Sydney, which manages an endowment portfolio, aims to distribute 5 per cent of assets, adjusted for inflation, each year.

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