Endowments & Foundations Part 2: Asset Allocation

Mod Note (Andy): Read part onehere

Now that this crazy week is coming to an end I have some time to write another one of these posts. Part 1 gave an overview of the E&F industry, and now Part 2 is going to go into detail on a crucial part of the E&F investment process: asset allocation. Many call E&F professionals asset owners rather than asset managers, however I see them as both. Going through asset allocation discussions gives you exposure to a strategic side of investing that you won't find anywhere else. While you aren't out there picking stocks or modelingLBOs, you have to understand everything going on in the various asset classes to make the best possible decisions.

Asset Class Definitions

这听起来真的很简单，但是没有普遍同意定义资产类别的方法。定义课程的目的是将潜在回报和退货驱动力的投资分组（即股权，对利率的敏感性等）。最常用的资产类别是国内股权，外国股权，私募股权，绝对回报，自然资源，房地产和固定收益。bob电子竞技大赛这些最高级别的大多数还将具有子资产类别，例如L/S权益和在绝对回报下的多策略。目的是拥有足够的资产类别，以正确地使这些回报的潜在回报和驱动因素多样化，但并不多于您稀释效果。大多数捐赠基础都在努力最大程度地提高潜在回报，同时最大程度地减少了下行风险，而这正是投资组合分配给上述资产类别的产品。

Target Allocations

每个人捐赠吹捧alloca目标投资组合tion in their annual reports, but rarely do you see an actual portfolio that is identical to the target. This can result from an asset class over or under performing its expected return or a short term change in asset allocation that does not affect the long term allocation portfolio. Ever year investment committees meet to determine what the ideal, long term asset allocation should look like. The target portfolio doesn't typically change much year-to-year, but there can be huge variations in the actual portfolio that investors need to be able to justify to their ICs. The target portfolio can vary widely between E&Fs as well, as shown below by analyzing target portfolios for two prominent endowments.

Asset Class (Portfolio 1, Portfolio 2)
Domestic Equity (11%, 6%)
外国股权（22％，13％）
私募股权（18％，31％）
Absolute Return (16%, 20%)
固定收入（10％，5％）
Natural Resources (11%, 8%)
Real Estate (12%, 17%)

You can see that even among the greatest and largest endowments, there are huge discrepancies in asset allocation. Neither is wrong in their approach – each group has reasons for making these allocations. In addition to expected returns, target portfolios are generated based on liquidity needs, fund structures, sub asset classes, and a host of other endowment specific issues.

Deviations from the Target Portfolio

This happens all the time. You may currently be allocated on target at 13% for Foreign Equity, but something just happened in Brazil and you think this is the chance of a lifetime. You decide to give a chunk to a top Brazilian equity manager and now two years later your Foreign Equity allocation is actually 17%, not 13%. One of the most interesting parts of the asset allocation process at an endowment is determining when to make these deviations from the target portfolio. These can be career defining situations depending on your IC. If it works out, you could be the next CIO; if not, well you know where this is going. Understanding markets enough to make these calls is what makes a truly great endowment investor. A large part of the job is doing the research to determine where is best to put money to work.

Quantitative vs. Qualitative Asset Allocation

I wanted to briefly touch on this before the post concludes. There are quantitative and qualitative ways to determine asset allocation – for the target portfolio and short term deviations. The preferred approach varies by team, but in my opinion a blend of the two is the best way. Mean-variance analysis is commonly used and there are many quantitative models that can spit out the "ideal" asset allocation. However, we all know that models aren't perfect at seeing into the future and therefore a healthy dose of skepticism is needed. I think these models are a great starting point for qualitative discussions on asset allocation.

Conclusion

This wraps up Part 2 on Endowments & Foundations. Feel free to ask any questions or make a request for the next topic. If you are interested in working in the industry, I've seen two investment analyst postings in the last week on job boards and I am sure there are other opportunities out there that I haven't seen.

Part 1 – //www.xinhe369.com/forums/endowments-foundations-part-1-a-a-basic-ov。