Endowments conference learns lessons from the US Ivy League

There is no easy answer to questions of managing liquidity and risk factors, according to discussion at a recent conference on endowments hosted by the Cambridge Judge Business School and the University for Business Administration and Economics in Vienna.

The British economist John Maynard Keynes famously said: “In the long run, we are all dead.” But his plea for prompt policy action in times of crisis fell on deaf ears at the Conference on Endowment Asset Management in Vienna.

“Endowments have one big advantage as investor. They can focus on the long term,” said Austrian investor Peter Pühringer, whose endowment POK Privatstiftung hosted the meeting aiming to discuss challenges – ranging from risk management to sustainability and liquidity – that endowment funds have experienced in recent years.

David Chambers, lecturer at the University of Cambridge, said asset managers can learn important lessons from the success of Harvard and Yale University endowments. His case study on the strategy of the Norwegian State Fund indicated that a single strategy would not work with all institutions.

‘Illiquidity premium’

Neal Stoughton, a professor for Finance and Endowment Management at the University for Business Administration and Economics in Vienna, suggested Norway boost its holdings of illiquid assets to capture the “illiquidity premium” long-term investors can reap in asset classes like private equity.

Norway’s fund should have followed Harvard and Yale, who dared to move into these asset classes in the early 1990s. The Harvard endowment has earned 12.9% annualised return over the past 20 years; Yale has achieved 14.2% over the same period.

Yet this road to riches might be too narrow and crowded for an institution like the Norwegian Sovereign Wealth Fund, argued Antti Ilmanen, who has been advising Norway’s Government Pension Fund, and recently joined hedge fund AQR.

A $700bn flagship fund might be too big to sail safely through the relatively small markets that offer illiquidity premia to enhance returns. At the same time, even a small diversification strategy might overwhelm sectors like private equity funds with liquidity.

Addressing alternative beta strategies, Ilmanen warned that diversification had not worked well in many portfolios, because equity risk had been the dominant risk factor.

A case in point is Harvard, whose endowment fund fell 27.9% in value, from $36.9bn to $26bn, even though the investment team diversified into alternative asset classes.

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