DC Plan Investors Can Learn From Endowment Portfolios

Endowment investors’ allocation to alternatives increased by 1% to 53%, while the overall bond allocation decreased by 1% to 8%, Nasdaq says.

Diversified emerging markets was the best performing overall asset class for the Endowment Index during the first quarter of 2017.

The Endowment Index, calculated by Nasdaq OMX, shows portfolios using the endowment model grew 4.95% (on a total return basis) for the quarter ended March 31, 2017, closing with an index score of 1,125.13.  The firm observes the S&P 500 index gained 6.05% for the same period. 

“Global markets have had a broad and favorable upward bias to start 2017,” Nasdaq reports. “This was reflected in 15 of the Index’s 19 components providing a positive return for the first quarter.  While emerging markets-diversified was the single best performing overall asset class (+11.74%) for the quarter, the Index components providing the greatest overall contribution to the Index’s positive performance were private equity (+1.02%), domestic equity (+0.92%), and international developed equity (+0.70%).”

Nasdaq finds negative performers included “oil/gas, managed futures, commodities and international bonds, although the impact from these declines was minimal.”

Important to note, the index was “reconstituted and rebalanced in early February, with some minor changes to several asset classes.”

“Overall, the allocation to alternatives increased by 1% to 53% while the overall bond allocation decreased by 1% to 8%,” Nasdaq says. “Within those asset classes, venture capital increased while allocations to developed and emerging market debt, as well as distressed debt were reduced.”

There are important differences to consider between endowment model investing goals/processes as compared with Employee Retirement Income Security Act (ERISA)-governed retirement plans, yet the firm suggests investors can still learn from the example set by large, disciplined endowment portfolios. For example, endowments generally benefit from a willingness to pursue alternative asset classes and by being willing to commit capital across longer time scales. They also seem to understand that short-term risk, and even some losses, must be accepted in the name of long-term performance. Retirement plans may be limited in some circumstances from mimicking endowment portfolios by liquidity concerns, but thinking around these topics is shifting.

Nasdaq encourages readers to visit www.endowmentIndex.com to download an index fact sheet or full spreadsheets containing longer term performance information.