An Endowment's Superpower
December 3, 2018 - When investment funds work together to strengthen a portfolio, their power is comparative to that of the Justice League – each fund bringing its own personal strength to the table, working in tandem with others to achieve the highest optimal return on investment. Sitting atop this hierarchy of investment superheroes is the specialty service of endowment fund management. Endowments have long been admired within the industry for their innovation, progressive theories, advanced techniques and perhaps most importantly, investment performance. If endowments had a superpower, it would be time.
An endowment fund is an investment fund started by an organization, which makes regular withdrawals from the invested capital. Typically utilized by nonprofit organizations, universities, churches and hospitals, the funds withdrawn assist with operating expenses to sustain missions, programs and purpose.
There are various reasons endowments have an advantage when compared to other industry segments, but chief among them is the notion of time constraints or, in this case, the lack of time constraints. Endowments are distinct – they don’t have life expectancies or retirement dates. In other asset types, time reduces one’s risk tolerance, opportunity set and portfolio performance, but this is not the case with endowments.
Endowments possess a timeless dimension. Aside from the portion of the investment return typically earmarked for spending, endowments are, by their nature, perpetual. They are void of time constraints – a unique aspect which highly favors this asset type in the capital markets. Endowments use the advantage of time in three distinct ways – fostering patience, enabling separation, and providing perspective. The unlimited investment time horizon for endowments enhances performance and leads to improved processes.
Similar to superheroes risking it all each time they go up against an adversary, even our powerhouse endowment endures a risk upon its establishment. It’s a fundamental aspect of earning investment returns and returns are far from uncertain – they are unpredictable at best. For example, stocks do not perform better than cash every day – or every month or every year. Investors often endure years, or even decades, of ups and downs with seemingly little reward. Fortunately for endowments they are, in a sense, “endowed” with an abundance of time. Time and patience combine as a powerful force in the capital markets. Since time constraints are not an issue for endowment funds, they are able to seek and find long-term returns. Endowments have staying power.
When a superhero commits to fighting for the greater good, he or she isn’t tasked with a set term – they commit to the task indefinitely. Endowments are the same – it’s the long-term commitment you desire. Full confidence can be placed in the assets available for investment, which enables smart endowments to turn this into earning power. Opportunities, such as real estate development projects, require a funding certainty and a time commitment that lines up with a specific business plan, which is typically more than 10 years. Endowments, unique from other asset types, can offer this for added investment return. Endowments have earning power.
Power of Perspective
Although perpetual by nature, endowments still possess a risk tolerance and a risk budget. Their strength, however, lies in the perspective, which anchors them to the reality that time is on their side. It is this perspective that provides endowment decision-makers the ability to overcome normal human tendencies, which could potentially lead to devastating results during stressful market conditions. Their long-term perspective allows endowments to objectively assess risk and reward on a timeline that allows portfolios to be managed for maximum return and risk efficiency.