Richard Ennis is an old school endowment consultant and pioneering quant who has been arounds for ages. He has been able to provide effective arguments with simple numbers. His sage advice should always be heard. You don't have to agree, but it is worth thinking through the reason for why he may be wrong.
His latest paper "The Modern Endowment Story: A ubiquitous United States Equity Factor" should serve as a warning sign for many endowments. He analyzes some of the largest endowments in the United States and makes some strong conclusions:
- Endowments are well diversified across managers but their overall high stock allocations with limited alpha suggest that underperformance is driven by high fees. Reduce fees and returns will go up.
- US endowments have a high home bias / US dollar bias. If something goes wrong in the US, there is limited diversification benefit.
- Endowments have an extraordinary high risk exposure to equities, much more so today than in the past. Stocks and a small allocation to cash are their current version of the endowment model.
- Risk tolerance has increased significantly given this high stock allocation. An endowment may not even be fully aware of its more aggressive tendencies given the trustees have not likely changed.
The following show the endowment problem. Performance has been below an empirical benchmark while at the same time exposure to equity risk has increased.
All you have to do is ask a simple question to see the problem, "What happens if we have a bear market?" Even with alternatives, the environment will not be pretty. This is the time to think about adjusting equity exposures.
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