extensive discussions of investment processes and returns. Both
were relatively large in 2014, $23 billion and $21 billion, respectively,
and are managed by external companies (Stanford Management
Company [SMC] and Princeton University Investment Company
[Princo]). Their reports reflect five themes that are common to many
in our sample:
1. An equity orientation in asset allocation driven by the need for
long-term growth and inflation exposure to service organizational needs.
• Princeton (2014, p. 17): “Readily manifest [in the asset alloca-tion] is Princo’s bias towards equities or equity-like assets—
95 percent of the portfolio is allocated toward these investments.” As noted above, the bias toward equity is echoed by
many endowment reports. Notably, the 95-percent allocation
quoted by Princo includes the “independent return”
2. An emphasis on excellent third-party managers as a critically
• Stanford (2014, p. 1): “Stanford University’s brand and SMC’s
reputation as a stable long-term source of capital enable SMC
to gain access to the best third-party managers in the world.”
3. Diversification as a key means of mitigating risk, with minimal
elaboration and caveats about the relative importance of qualitative judgments.
• Stanford (2014, p. 1): “The ... portfolio is constructed on a
foundation of modern portfolio theory and strategic asset
allocation. ... SMC also seeks to add value through effective
risk management, tactical portfolio rebalancing and opportunistic investment tilts.”
4. A focus on less efficient markets where return premiums can be
achieved, often with specific reference to private markets and
remarks that the long-term investing horizon of the endowment
is well-suited to that opportunity set.
• Princeton (2014, p. 19): “The ‘Grand Unifying Theme’ [of
non-U.S. local managers], while very important, is not fully
visible in the policy portfolio as it cuts across several asset
categories.” Princeton indicates that its asset allocation
includes emphasis on global/ex-U.S. investments across its
asset categories, though it shows geographic breakouts only
for public equity.
5. A corresponding overlay of liquidity considerations with separately monitored targets.
• Princeton (2014, p. 18): “The endowment [has a] finite tolerance for illiquidity, and [we had] a view that we could better
use “illiquidity units” by shifting allocation from Real Assets
to Private Equity [because] Private Equity’s roster is broader
and deeper (paralleling a richer set of prospective managers)
and provides better opportunities to deploy capital with managers who can generate very high absolute returns.” This provides a particular example of two trends: the primacy of manager choice over strategic asset allocation and the separate
monitoring of liquidity across asset categories.
Similar statements from other endowments appear in appendix B.
Asset Category Innovations: Incremental Granularity
Among a significant number of endowments, we observe a positive
trend toward granularity especially in the absolute return and natural resources categories.
Incremental granularity: hedge funds. Despite the diversity of
strategies within the absolute return bucket, relatively few institutions provide further granularity. Indeed, there seems to be debate
about the premise of the category. Yale describes core holdings in
its absolute return bucket as long/short equity strategies (event-
Table 3: Institutions Subdividing Absolute Return/Hedge Fund Categories
Hedge Fund Category Other Categories
Georgia Institute of Technology 2 Long/short equity Multi-strategy hedge funds
Williams College 2 Global long/short equity Absolute return
University of Illinois Foundation 2 Marketable strategies: hedged equity Marketable strategies: credit/absolute return/distressed
University of North Carolina at
Chapel Hill 2 Long/short equity Diversifying strategies
University of California 3 Opportunistic equity Absolute return strategies, cross-asset class strategy
University of Texas System 6 Developed-country equity, emerging markets Credit-related fixed income, investment-grade fixed income, real estate, natural resources
University of Washington 2 Capital appreciation: opportunistic Capital preservation: absolute return
Pennsylvania State University 3 Hedged strategies: equity related Hedged strategies: credit-related hedged strategies: other
The Ohio State University 2 Long/short equity Relative value/macro, credit funds
University of Virginia 2 Long/short equity Marketable alternatives and credit