2021 was a banner year for endowments and foundations (E&Fs) as momentum gained around alternatives and private equity allocations to reduce portfolio risk. Some surprises emerged as smaller E&Fs failed to benefit from such allocations as much as larger E&Fs.
As the impacts of the ongoing pandemic, inflation and increasing interest rates take hold this year, public and corporate plans are assessing their investment and allocation strategies in the midst of continued market volatility.
What will be in store for E&Fs and plans in 2022? Here are our thoughts.
Risk-controlled allocations
Recent news suggests the Fed will move quickly in 2022 to raise interest rates to combat inflation. In response, some E&Fs are suggesting a defensive focused, quality investment approach across both equity and fixed income. Others are making specific calls on style rotation such as moving to large cap value to hedge against inflation. In general, we can expect to see continued market volatility throughout the year.
Public plans have lowered their target returns, on average from about 8% to 7% over the last few years, and their funded status is the highest it has been (about 75%) since before the financial crisis. A recent analysis by Willis Towers Watson revealed that about 96% of the largest corporate pension plans are fully funded as well. Therefore, we expect to continue seeing allocations leaning towards very risk-controlled, liability-driven investing (LDI) favoring quality fixed income over equities.
Shift from public to private equity
While public plans tend to have higher allocations to equity, they have also been lowering those allocations overtime. Going forward, we expect movement from public to private equity within public plans to continue despite their focus on DNI, ESG and fees over the last few years. Transitioning to more alternatives and private equity certainly could dampen some of those initiatives.
Throughout 2021, we also found that when it comes to alternative allocations, bigger was clearly better. Larger E&Fs improved their performance when they added alternatives versus those that did not. Surprisingly, smaller E&Fs that added alternatives actually underperformed their peers that did not allocate.
Risks for smaller funds
Despite a banner year for endowments only with the median return at 20.45%, and for E&Fs with the median return at 20.43%, risks are on the horizon for 2022 especially for managers of funds under $500 million. The strong performance this year has again been driven by increased allocations to alternatives, which raises concerns for smaller endowment funds who lack access to top private equity and venture capital funds.
However, larger endowments should also be cautious in 2022 as they face increased exposure to alternatives which could create superficial performance. Although 2021 was a record-breaking year for IPOs, many struggled with lackluster stock performance and investor fears of inflation, rising rates and volatility. Roughly two thirds of the companies that went public through traditional IPOs in 2021 have shares trading below their offer price, according to PwC.
Peering into the plan universe
As endowments and plans face volatility and uncertainty in 2022, digging deeper into performance drivers and uncovering insights are the best way to guide the critical investment and allocation decisions that lie ahead.
Peer-to-peer plan comparisons can provide endowments with a clear view of how certain funds allocate their investments and how they perform. Peer benchmarking can help defined benefit plans ensure alignment with investment policies and liquidity requirements, and ascertain how their peers in similar situations are attacking challenges.
While there this is no crystal ball that will dictate exactly what to do, gaining the right insight can help asset allocators make more informed decisions.
Disclaimer
The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar.
This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision.
Investment Metrics, a Confluence company, does not provide investment advice and nothing in this document should be considered any form of advice. Investment Metrics accepts no liability whatsoever for any information provided or inferred in this document.
