Practical Applications of The Modern Endowment Story: A Ubiquitous US Equity Factor

Abstract

In The Modern Endowment Story: A Ubiquitous US Equity Factor, from the November 2022 issue of The Journal of Portfolio Management, author Richard Ennis (retired chairman and cofounder of EnnisKnupp) concludes that the endowment model is broken and makes three recommendations for repairing it: 1) dramatically reduce costs, 2) reevaluate risk tolerance and consider reallocating assets to investment-grade bonds, and 3) consider diversifying into global stock markets to reduce exposure to the US stock market. The traditional endowment model of diversified investing is designed to fund a nonprofit institution’s expenses while protecting principal against depletion. However, the largest endowments generally underperform the market, except when alternative investments like hedge funds are producing extraordinary returns. Ennis finds that, in the years since the 2008 global financial crisis (GFC), the performance of large endowments has become almost exactly correlated with that of the US stock market, alternative investments have provided no diversification benefits, and portfolio management costs have been the main cause of endowment underperformance. Endowments have also increased their exposure to the US equity factor in recent years, even as overall endowment performance gets worse.