Asset allocation is the most fundamental decision an institutional investor must make, especially large endowments that manage tens of billions in assets. Nevertheless, there is no tried-and-true formula one can follow without deliberate thinking at the investment office.
Harvard Management Company, which manages the nation’s largest endowment of $36.43 billion, noted in its 2015 annual report that all asset allocation approaches are imperfect in their own way. The endowment overhauled its “standard mean-variance framework” last year after deciding that it “relied on highly uncertain risk and return assumptions for an often large number of asset classes,” the company said in its annual report.
Super-sized endowments are often trailblazers when industry norm changes. Yale’s endowment, the nation’s second largest, was among the first to shift asset allocation away from stocks and bonds to alternative assets as early as in the 1980s. As of last year, about 57 percent of Yale’s endowment was invested with alternative asset funds. Its legendary 20-year return of 13.7 percent per annum has inspired many peer institutions to follow suit.
“If you invest in alternatives right, you end up with much better results, much greater performance,” said Erik Lundberg, chief investment officer at University of Michigan Investment office, which manages the university’s $10 billion endowment, in a March interview with Trusted Insight.
However, making successful alternative investments can be more complicated than picking stocks in public markets. Achieving market-beating returns depend largely on the ability of alternative asset fund managers . “Those programs have to be built up over time with the best relationships. You have to find ways to invest and work with the top-tier fund managers,” Lundberg said. “These are the people who actually can create value and can recognize a great value, rather than just put money to work in the asset class.”
1. Harvard University - Harvard Management Company
CIO: Stephen Blyth
AUM: $36.43 billion
Asset Allocation:
Public Equity: 33%; Private Equity: 18%; Hedge Funds: 16%; Fixed Income: 10%; Real Assets & Real Estate: 23%
2015 return: 5.8%
2. Yale University - Yale Investments Office
CIO: David Swensen
AUM: $25.57 billion
Asset Allocation:
Public Equity: 18.6%; Private Equity: 32.5%; Hedge Funds: 20.5%; Fixed Income: 7.7%; Real Assets & Real Estate: 20.7%
2015 return: 11.5%
CIO: Andrew Golden
AUM: $22.72 billion
Asset Allocation:
Public Equity: 26%; Private Equity: 25%; Hedge Funds: 25%; Fixed Income: 5%; Real Assets & Real Estate: 19%
2015 return: 12.7%
4. Stanford University - Stanford Management Company
CIO: Robert Wallace
AUM: $22.22 billion
Asset Allocation:
Public Equity: 29%; Private Equity: 26%; Hedge Funds: 22%; Fixed Income: 5%; Real Assets & Real Estate: 18%
2015 return: 7%
5. University of Texas System - UTIMCO (The Permanent University Fund)
CIO: Bruce Zimmerman
AUM: $13.56 billion
Asset Allocation:
Public Equity: 19.4%; Private Equity: 20.7%; Hedge Funds: 38.6%; Fixed Income: 4.9%; Real Assets & Real Estate: 16.4%
2015 return: 0.43%
6. Massachusetts Institute of Technology - MITIMCo
CIO: Seth Alexander
AUM: $13.46 billion
Asset Allocation:
Public Equity: 35.5%; Private Equity: 17.8%; Hedge Funds: 9.8%; Fixed Income: 17.7%; Real Assets & Real Estate: 19.2%
2015 return: 13.2%
7. Texas A&M University System
Treasurer: Maria L. Robinson
AUM: $10.48 billion
Asset Allocation:
Public Equity: 48%; Private Equity: 13%; Hedge Funds: 9%; Fixed Income: 15%; Real Assets & Real Estate: 15%
2015 return: -0.35%*
8. Northwestern University - Northwestern University Investment Office
CIO: William H. McLean
AUM: $10.63 billion
Asset Allocation:
Public Equity: 28.4%; Private Equity: 20.7%; Hedge Funds: 18.7%; Fixed Income: 17.6%; Real Assets & Real Estate: 14.6%
2015 return: 2.5%
9. University of Pennsylvania - University of Pennsylvania Office of Investments
CIO: Peter Ammon
AUM: $10.13 billion
Asset Allocation:
Public Equity: 41.6%; Private Equity: 11.6%; Hedge Funds: 31.3%; Fixed Income: 5.7%; Real Assets & Real Estate: 10%
2015 return: 7.4%
10. University of Michigan - University of Michigan Investment Office
CIO: Erik Lundberg
AUM: $9.95 billion
Asset Allocation:
Public Equity: 28.3%; Private Equity: 25.6%; Hedge Funds: 16.8%; Fixed Income: 14.3%; Real Assets & Real Estate: 15%
2015 return: 3.5%
* Texas A&M University System’s 2015 return is for Texas A&M Foundation only. It is one of the three investment pools that benefit the university system.
For more endowment-related lists and rankings, please click here.