Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
The market decline and liquidity crisis took a particularly hard toll on many endowments and foundations. During the past decade, endowments and foundations — particularly the larger funds — decreased their allocations to liquid asset classes and increased their commitments to less-liquid investments, such as hedge funds and private equity in an effort to boost overall returns. When the financial downturn hit, however, the opposite happened as many funds were unable to get out of poor-performing investments, dragging down overall portfolio performance. As a result, some endowments and foundations might return to more traditional asset allocation models. And, although most endowments and foundations don't expect this performance to affect their spending in fiscal year 2009, the outlook for 2010 was less certain.
Between 1998 and 2008, endowments and foundations steadily increased their allocations to alternative investment strategies in an effort to boost overall portfolio performance. This portfolio shift, however, has come at the expense of more liquid investments.
The recent financial downturn had a significant negative impact on the returns of many endowments and foundations. The performance of large funds, however, started to rebound during the second and third quarters of 2009, according to the Northern Trust Universes, which represents more than 300 large investment plans with combined assets of $390 billion.
Almost 45% of endowment executives expect no changes to their funds' fiscal 2010 spending rates as a result of the decline in investment performance. Still, 17% of executives say they plan to decrease their funds' spending rates as a result of the economic downturn and decrease in the portfolios' market values.
“Endowments and foundations are re-evaluating their investment policies and their approach to overall portfolio management. Rather than classifying investments as 'traditional' or 'alternative,' these institutions are considering the role each investment strategy plays within the portfolio. These roles include market exposure, risk reduction, return enhancement and inflation hedge.”
— Kieran Browne
Senior Relationship Manager for Foundations, Endowments and not-for-profit Organizations, Northern Trust