U.S. endowments, foundations increasingly outsource investment management
NEW YORK, UNITED STATES — Small endowments and foundations in the United States are increasingly turning to outsourced investment management to navigate the complexities of modern financial markets.
According to a Financial Times report, this shift is driven by the need to access profitable but illiquid alternative markets, as traditional revenue streams have become unreliable and operational costs have surged.
Collectively managing trillions of dollars in assets, these organizations face heightened pressure to generate income through investments due to declining donations and other financial challenges.
Exploring alternative asset classes for higher returns
Endowments and foundations are venturing into alternative asset classes, such as private equity and venture capital, which promise higher returns than conventional investments like stocks and bonds.
Bernard Reidy, Bank of America’s national endowment and foundations executive, said, “There is a benefit of an illiquidity premium that could be added to liquid investments.”
He added that private market returns can exceed public equities by 2-3% or more under skilled management.
However, the effectiveness of outsourced chief investment officers (OCIOs) remains debated. Dennis Simmons of the Committee on Investment of Employee Benefit Assets cautions that outsourcing is “not a panacea” and does not guarantee superior performance over in-house teams.
Cost efficiency drives outsourcing decisions
The move towards outsourcing is also motivated by cost considerations. Many organizations have reduced overhead costs by eliminating in-house investment teams.
Matt Bank, deputy chief investment officer of OCIO firm GEM, noted that smaller endowments cannot afford the extensive teams required for effective investment management, making outsourcing a cost-effective solution.
“If you have a $500mn endowment, you simply cannot afford that level of team and staff,” Bank stated. “It’s not cost-effective.”
Institutions like Macalester College have embraced this model, disbanding their internal teams in favor of external managers to gain access to higher-earning alternative asset managers.
“Our hope is that it’s easier to sustain a group of investment professionals in this OCIO model,” said Patricia Langer from Macalester College.
Evaluating mixed results and future prospects
While some organizations report success with OCIOs, others remain cautious. The Delaware Community Foundation experienced improved stability in its returns after hiring an OCIO, according to its president, Stuart Comstock-Gay.
However, an OCIO performance index by Alpha Capital Management highlighted that these outsourced models have underperformed compared to traditional benchmarks like the S&P 500 over the past decade.
As endowments and foundations continue to navigate financial uncertainties, the debate over the efficacy of outsourcing investment management persists. The decision to outsource remains a strategic choice influenced by each organization’s unique circumstances and financial goals.
