Can Institutional Investors Take a Cue From Endowments and Foundations?

In this year’s edition of CAPTRUST’s “Endowment & Foundation” survey, the advisory firm highlights the unique needs of nonprofits with long-term investable asset values between $10 million and $250 million.

The fourth annual survey includes the perspectives of more than 150 organizations, covering both public and private foundations with focuses ranging across religious, educational and other charitable missions. It seeks to provide data-driven insights to help nonprofits and their leaders identify which practices create positive outcomes and which activities may not yield results.

The survey included new questions regarding diversity, equity and inclusion. According to  CAPTRUST’s summary of the results, 69% of respondents indicated that DE&I is a priority for their organization, meaning that it is part of the organization’s mission statement or actively discussed in board meetings. Among the organizations that prioritize DE&I, the top issues of concern were race and ethnicity (89%), gender (73%) and culture (47%).

When it comes to their portfolios, 38% of organizations are using environmental, social and governance-themed investments or mission-aligned strategies. This is up 27% year-over-year, the report says. The findings mark the second consecutive survey with more organizations allocating to ESG or other values-based strategies. Additionally, more organizations (28%) are adopting positive screening methodologies (up from 22%), meaning they look to invest in companies that align with their values.

“We anticipate seeing additional organizations not only leverage ESG investments but also prioritize positive screening methods to ensure a more direct alignment with their mission. Those organizations that are able to clearly communicate this to their donors may have an advantage over other organizations,” says Grant Verhaeghe, senior director, endowment and foundation practice leader at CAPTRUST.

For those organizations that are not currently investing in alternatives, 26% cite a lack of portfolio size, while 25% express concerns about liquidity. Another 9% feel there is no perceived benefit to investing in the space.

The survey also notes that this year, most investors are using active management in every asset class, while previously, the emphasis towards active strategies existed only within alternatives. Across five asset classes—cash, fixed income, foreign equity, domestic equity and alternative/other—the survey found that most respondents indicate no anticipated adjustments for 2022. Among those expecting a change, the most frequent objective is to increase exposure in alternatives.

As nonprofits seek to maintain required levels of return to support their philanthropic mission, many investors expect traditional asset classes to deliver lower returns over the next 10 years, the survey says. This helps to explain the common response that organizations are going to decrease exposures to cash and fixed income in favor of domestic and foreign equities.

Larger endowments and foundations allocate to alternatives at a higher rate than their smaller peers, and every respondent with more than $500 million in investable assets uses this asset class. Additionally, the survey shows that investors with more than $100 million in assets allocated a larger proportion of their portfolio to alternatives.

An increasing number of endowments and foundations are considering whether to add alternative investments into their institutions’ portfolio. However, the survey notes that it is important for investment committees and boards looking into the suitability and usage of these investment strategies to focus on the liquidity needs of the organization.

Real estate was found to be the most popular alternative investment regardless of the liquidity category, the survey says. Though commodities can provide outsized returns in certain market conditions, few nonprofits directly invest in the asset class after a decade of challenging performance.