At first glance, writing a post on defining the “endowment model” may seem rather unnecessary. Isn’t it obvious? The problem is that it is often defined as one very specific investment strategy — a multi-asset class portfolio of external investment managers. This definition is incredibly narrow and can lead endowment investment organisations to jump to executing this strategy without first considering a whole range of possible endowment strategies depending on their organisational foundations. This simple concept is core to everything else that is to come so it seemed the perfect place to start the blog series.
The endowment model and the Yale Investments Office are often synonymous and for good reason. The late David Swensen (Yale’s Chief Investment Officer until his death in 2021) is the industry’s most seminal figure. He revolutionised institutional portfolio management with many institutions around the globe emulating his highly successful approach. His seminal book, Pioneering Portfolio Management, is on almost every investor’s bookshelf. Yale’s portfolio is a globally diversified, multi-asset class portfolio, executed through external 3rd party active investment managers. When people speak of the endowment model, they therefore naturally think of a portfolio like this. In fact, if one Google’s “What is the endowment model?”, the top hit returns the following definition:
“An endowment model is a type of investment inspired by university endowment investment styles, particularly the Yale University fund. It consists of a blend of typical investments including stocks and bonds in addition to less traditional offerings such as hedge funds and private equity. The balance tends to be heavy on equities and light on low-yield investments such as bonds. This kind of investment style focuses on maintaining low liquidity, the risk of which can be managed by committing to long-term investments.” — wisegeek
However, this is but one expression of an endowment portfolio. Indeed, Swensen himself urged others not to blindly copy the Yale approach.
What defines an endowment is not the strategy implemented but rather the nature of the capital itself. By definition, an endowment fund is simply a pool of capital whose purpose is to fund something in perpetuity or at least for a very long time. An endowment portfolio typically represents a very large piece of an organisation’s or family’s wealth, which creates a strong dependence on the portfolio’s future investment returns to fund the operating budget.
This definition encompasses a a whole range of different funds. Indeed, Berkshire Hathaway is the effective family office of Warren Buffett and also represents an endowment. Buffett just employs a different strategy. Other endowment funds follow Yale’s approach, some follow a blend of manager and direct investments (the hybrid approach) while others invest in a concentrated portfolio of direct investments. The latter is the case for many wealthy fund managers — their endowment is often invested alongside their investment fund.
Once we expand our horizons to define an endowment by the nature of the capital, it opens our minds to a range of potentially great investment strategies, each suited to different organisations depending on their foundations, the subject of our next post. It is important not to jump immediately to a particular strategy without first considering if it is the right one.