Too often, the endowment model is incorrectly viewed as merely an alternatives-heavy approach to asset allocation, Urie says, when it is purely a framework for thinking about institutional investment. “It is a form of investing with a long-term horizon,” she clarifies. “Each investor steps back and asks: ‘What is the role of this portfolio, and what is the financial structure of our organisation? How dependent are we on [the portfolio]?’ “That can lead to an asset allocation with alternatives, because it’s consistent with what they’re trying to achieve.” These questions ensure that endowment-style investors do not employ a ‘set and forget’ approach to asset allocation. These investment policies must be revisited, tested and again prove themselves. Also, over time, new asset classes have emerged, such as real estate and non-US investments in the mid- 1980s, which have better met the needs of investors. More recently, institutions have shifted to an asset allocation which classifies assets according to the roles they perform in portfolios, rather than the asset class they belong to.
“What’s more recent is investors are taking these traditional asset buckets and acknowledging more explicitly the role they play in the portfolio.” This progression, from asset class silos to roles, has resulted in Cambridge clients segmenting their portfolios into four categories: growth, macro hedging, diversifiers and cash as “dry powder” to make opportunistic investments, Urie says. These days, endowment investors are keeping more cash available to meet funding needs as well as capitalise on opportunities. Distressed credit was a big opportunity in the past two years, but “there is no table-pounding buy out there now”, Urie notes, adding that leading US endowments have only changed their policies “at the margins”. But as investors eye more innovative ways to allocate capital, Urie offers a reminder: “The more you put into these asset classes, the more you take out of the long-term growth engine of equities.”
In other words, long-term liabilities should not be forgotten. Neither should the inevitability of asset bubbles. There are some expressions, which resurface from time to time, that should stop investors in their tracks: new paradigm, new era, new age. Urie interpets them as a reminder to check market fundamentals. “When things start to get twoto- three standard deviations away from the long-term, and you begin to hear talk of a new paradigm, you have to step back and ask yourself if you believe it, and if you do, then why.” Asset bubbles are strange phenomena, and have few parallels outside investment markets. In supermarkets, for example, if popular goods increase in price, demand naturally pulls back as consumers tire of paying higher prices. “But in markets, when prices go up, people buy more.” Conversely, when goods are cheap, shoppers rush in to buy up stock.