asset allocations and also scaffold the entire investment process
(see sidebar). Strategic asset allocation depends upon assumptions
about anticipated returns, co-movements, and risk at the category
level. For many institutions, the category in which an investment
sits can determine its selection and monitoring process. In this
paper, we focus on the first step of the investment management
process, defining asset categories and benchmarks, through the
lens of U.S. university endowments.
Asset categories serve multiple goals within a strategic asset allocation process. First, an asset category should represent a significant,
clearly defined segment of the investment universe. Second, for
diversification purposes, asset categories should have performances
that are relatively uncorrelated to each other. Third, ideally, a
category should have a well-specified benchmark so the manager
selection and other tactical decisions can be made in a relatively
systematic manner. Fourth, the risk-adjusted returns of a category
should be positive over long time periods. Investors are paid to
accept risks; they should be aware of the underlying risk factors
embedded in an asset category. Fifth, a category should be within
the ability of the investor to understand and invest in. Many financial experts and organizations such as the CFA Institute (2013)
emphasize these essential features when selecting an appropriate
set of asset categories. Our endowment report survey provides
ample evidence of asset categories serving these goals for university
investors in diverse ways.
Survey of University Endowment Self-Reports
We reviewed public disclosures for the endowments ranked as the
largest respondents to the National Association of College and
University Business Officers (NACUBO) Survey (NACUBO 2015).
The relevant information is available on university websites located
through commonly available search engines. We found fifty institutions among the largest seventy-two endowments that disclose
asset allocations in the context of performance and strategy discussions (see table 2).
1 From these universities, we collected public
materials available to us, such as asset categories and investment
Unlike most private investors, who in the absence of requirements
choose not to disclose information publicly, universities publish
reports on their endowment investing activities, giving direct
insight into current practices. These reports reflect incentive to
inform and rally the confidence of donors, although, like other
investors, endowments attend to their proprietary interests to
“keep the secret of the secret sauce,” including specific manager
relationships, selection processes, and tactical investment themes
(Cassar et al. 2016).
3 Reports often retain the same language from
year to year, so parts can seem like boilerplate, but comparing
reports across a wide sample reveals notable and interesting variations.
4 Within our survey, self-reports provide a unique window
on influential portfolios and their underlying investment processes, in particular identifying alternative approaches to categorizing assets.
In our analysis, we segmented the endowments into three groups.
We found that twenty-nine institutions, or 58 percent of our sample by count making up 56 percent of the total assets, follow a common paradigm in reporting—which we call the current norm. This
group uses five core categories: public equity, private equity, real
assets, absolute return, and fixed income. The second group of
fourteen endowments, or 28 percent of our sample, provides more
granularity, e.g., separating long/short hedge funds from other
strategies. A third overlapping set of six ( 12 percent) employ novel
groupings based on anticipated performance behavior, with categories such as growth, inflation, excess return, and diversifying.
In contrast to our survey, NACUBO reports more widespread use
of categories outside the current norm. Common categories noted
by NACUBO include growth assets, risk-reduction, and inflation
protection, as well as opportunistic and liquidity. Why aren’t innovative categories more commonly featured in the public reports we
surveyed? Investors may use multiple categories in their investment processes even if only one is chosen for governance and/or
mandates, and implement.
Table 2: Summary of University and College Endowment
Asset Allocation Reports
Total Number of Endowment Reports 50
Total AUM of Endowments $302 billion
Largest Endowment (Harvard University) $36 billion
Smallest Endowment (University of Delaware) $1.3 billion
Average AUM $5.2 billion
Median AUM $2.5 billion
Number over $10 billion 4
Number over $5 billion 13
Average Number of Asset Categories per
Endowment* 7. 3
AUM-Weighted Average 8. 6
* Fourteen endowments in our survey develop asset allocation for a hierarchy with
two or three levels of aggregation. We use the term “asset category” to describe the
lowest level in the hierarchy and the term “aggregations” to describe the higher levels.