bfinance Endowment & Foundation Investment Survey reveals that high inflation and market volatility has brought new pressures for ‘non-profit’ asset community

Frithjof VanZyp

A new survey conducted by the independent global investment consultancy, bfinance, on the topic of endowment and foundation investment has revealed a challenging investment climate, asset allocation intentions, and the importance of ESG. The Endowment & Foundation survey, dated November 2023, features data from 61 asset owners from 16 countries.

Significant investment challenges

The surge in developed market inflation has had serious implications for endowments and foundations whose return targets are either directly or indirectly tied to domestic CPI and similar metrics. More than 40% of investors say their investment returns have been below target over the past three years (or below expectation, in the cases where no formal target exists but the entity has an expected long-term return).

The ‘average’ respondent invests 41% of their portfolio in private equities and 18% in bonds, with 35% in ‘alternative’ asset classes. Even more interesting, perhaps, is the data on current skews versus long-term strategic asset allocation. Some 52% of investors are underweight private equity while 37% are overweight cash. These figures indicate that temporary over-exposures to illiquid assets seen in late-2022 (the result of public market volatility) are no longer in effect.

Looking ahead, 62% of respondents expect to increase exposure to private markets over the next 18 months, followed by fixed income (31%), and equities (22%).

Outsourced operating models are popular but costs cause concern

The endowments, foundations and non-profits in this study tend to have highly outsourced investment models: 23% have a ‘fully delegated’ or ‘outsourced CIO’ (OCIO) approach, while a further 48% describe their investment activities as ‘strongly outsourced’ though not fully delegated. There is no notable trend towards insourcing or outsourcing at present.

The asset classes where respondents most commonly invest entirely via external managers are liquid alternatives/hedge funds (85%), private debt (85%), and equities (83%). Meanwhile, significant minorities use internal teams for most or all investments in currency overlay (28%), real estate (18%) and fixed income (17%).

On average, respondents are paying 0.6-0.7% of assets each year in investment-related costs (median 0.5-0.6%). External asset manager fees heavily dominate the overall picture and, for more than a third of respondents, represent over 90% of all costs.

Responses indicate a widespread desire to reduce cost. The vast majority of respondents agree (28% ‘strongly’, 62% ‘somewhat’) that they ‘should be paying less’ in investment-related fees than they do at present. While 49% “strongly agree” that monitoring and benchmarking costs is a high priority, only 10% express high satisfaction with their current approach to benchmarking asset manager costs/fees.

With regard to investor satisfaction with manager performance, some 63% of investors in externally managed ‘multi asset’ strategies are dissatisfied with performance in 2023 (though, interestingly, feedback on OCIO managers— who also have a multi asset remit—is more positive). Over 40% of investors in externally managed equity strategies are also dissatisfied. Conversely, feedback is more positive for managers in (typically high-fee) illiquid asset classes including private debt (88% satisfied) and infrastructure (83% satisfied).

Endowments and foundations drive ESG and impact investment innovation

Given that endowments and foundations have stakeholders that are orientated towards ethical responsibility and investor in these groups also enjoy fewer specific regulatory constraints, they have been driving some of the most innovative impact, ESG and climate-related investment programmes.

Some 80% of respondents say ESG considerations are ‘very’ or ‘moderately’ important to their investment strategy and implementation. A more granular and informative picture can be gained through examination of specific ESG-related practices across asset classes.

Notably, while equities remain the dominant asset class for most of these practices, ‘impact investing’ shows a strong private market focus. 97% of equity investors integrate ESG into the investment process in this asset class, followed by fixed income (79%), private markets ex. real estate (58%), private real estate (48%), and hedge funds (15%).

It is instructive to contrast the data on practices with expectations that investors have for external asset managers in these asset classes. For example, 84% indicated that they have some sort of carbon-related objective in equities, but only 50% would be “unlikely to hire” an equity manager who cannot report on carbon or greenhouse gas emissions/intensity for the portfolio. Similarly, 92% indicated that they do “active engagement/stewardship” in equities, but only 47% would be “unlikely to hire” an equity manager who cannot demonstrate specific outcomes for engagement.

A significant proportion of this community invest in explicitly impactful strategies, particularly in private markets. Within this cohort, 38% are willing to accept a somewhat lower financial return for an impact investment. These investors are generally seeking both social and environmental impact (55% indicate that they’re equally interested in both), though a minority of respondents primarily look for one or the other.

Frithjof Van Zyp, Senior Director at bfinance in Australia, said: “Within our inaugural Endowment and Foundation Investment Survey, interesting insights have surfaced. With 42% expressing dissatisfaction over investment returns, 62% anticipating a strategic shift towards greater exposure to private markets, and 57% highlighting the critical role of ESG considerations in shaping investment strategies, the landscape is evolving. These findings offer valuable perspectives on how the non-profit community is navigating inflationary pressures while balancing performance, diversification, and sustainability in their investment approaches.”

Kathryn Saklatvala, Head of Investment Content at bfinance and lead author, said: “It’s a privilege to be able to examine the challenges and trends within the endowment, foundation and charity investor community at this interesting time. Inflationary conditions and higher interest rates affect different groups of investors in different ways and there is evidently still a strong relationship between inflation metrics and return targets for many of these entities, which has contributed to a significant degree of under-performance.

This investor community has long been recognised for its ability to foster innovation and creativity, thanks in part to liability profiles and lighter regulatory constraints than we often find in the pension and insurance sectors. US endowments’ historic activity in illiquid investments is one often-noted example of this effect. More recently, we have seen this group developing some of the most interesting and forward-thinking impact and climate-oriented investment programmes that we’ve yet seen. As such, the third section of this three-part study focuses on ESG and impact investing.”