Institutions managing investments with a long or perpetual time horizon are increasingly looking across asset classes, liquid and illiquid, to capture long term returns.
That’s according to the Endowment & Foundation (E&F) Group at JP Morgan Asset Management in London.
Kris Jonsson, Head of EMEA Endowments & Foundations, says: “A typical endowment needs to generate annual return greater than the sum of inflation and distributions, in order to preserve the portfolio value in real terms. With the current low yield environment, E&Fs are reviewing their strategic asset allocations and considering alternatives – which have historically both improved diversification and can enhance returns1.”
Sandeep Bhamra, Client Advisor in the Endowments & Foundation Group at JP Morgan Asset Management added: “The long-term investment horizon of these endowed foundations mean they are capable of absorbing market volatility and illiquidity in the pursuit of total return; therefore illiquid assets with an associated premium are particularly attractive to them. Alternative investments are especially being considered at a time when equity markets are at all-time highs and fixed income investors are predicting the end of an unprecedented bull run.
However, manager selection is key as there is a high dispersion in performance levels of alternative investment managers. This appetite for alternatives amongst E&Fs is also being guided by a need to partner with top performing alternative asset managers.”
Private Equity is an asset class that has gained acceptance as part of a broader asset allocation over many years where the allocation acts to enhance returns rather than as a diversifier. The trend we are seeing is the need to diversify globally and across buy-out, growth, venture and secondaries.
Private credit is being considered as an attractive way to harvest the illiquidity premium and for investors to capitalise on the disintermediation of banks in providing direct loans to corporates. This growing trend towards private capital being used to lend across the capital structures to corporates favours E&F investors with a long time horizon.
Hedge funds have historically been used as a lowly correlated portfolio diversifier that can provide downside protection in difficult market conditions and decent risk adjusted returns over time. Today, clients with long time horizons are shifting their priorities in favour of higher potential returns combined with more modest levels of diversification.
With a growing range of real asset strategies available to investors – and a wide range of risk – return characteristics— real estate typically represents a cornerstone of European Endowments and Foundations allocations, given its steady income potential, lower-volatility returns, and diversification versus other parts of the investment portfolio. Meanwhile, there is growing interest in adding core infrastructure to further strengthen diversification and provide downside resilience.
Bhamra says: “E&Fs recognise the evolving nature of alternative investments including private equity, private credit, hedge funds and real assets. In many cases the disciplined and in-depth due diligence needed in certain asset classes to capture strong returns, requires strategic partners. When consistently and patiently applied, such due diligence can drive returns in alternative asset classes well above public equity market returns; but less rigorously executed, it can also expose E&Fs to underperformance which is always a risk in pursuit of high alpha.”