Analysis of data from endowment funds raises questions on alt investments' value as return boosters and risk dampeners
Proponents of alternative investing may claim that heavy allocations to alts benefit portfolios, but one critic has added his analysis to the ongoing debate on alternative investments’ value.
In a recent blog post, Richard M. Ennis, a preeminent member of the CFA Institute and an early pioneer of institutional investing, took aim at a LinkedIn post by a senior CAIA Association executive claiming that “endowments that have allocated larger chunks to Alts materially outperform a 60/40 in the LT [and] see significantly less volatility and draw down risk.”
But that flies in the face Ennis’s recent examination of a group of large educational endowment funds that covered the 10 years ended June 30, 2018. His analysis was concentrated on endowments with assets exceeding US$1 billion and an average alternative-asset allocation of almost 60% over the study period.
Ennis said he generated a composite of returns for those investors using Nacubo data, then created an equivalent-risk passive benchmark – 72% stocks and 28% bonds – for the composite through returns-based analysis.
“I found that the endowment composite underperformed the equivalent-risk passive portfolio by 1.6% per year,” he said.
As for the argument on alternatives’ defensive value for portfolios, Ennis said the annualized standard deviation of the endowment composite’s returns stood at 11.7%. Over the same period, a 60/40 portfolio composed of the Russell 3000 and the Bloomberg Barclays Aggregate Bond Index exhibited a 9.4% annualized standard deviation in its returns.
“In other words, the alt-heavy portfolios were 24% more volatile than ‘60-40,’” he said.
He also shared a regression analysis of the endowment composite versus the 60/40 portfolio, which exhibited a slope of 1.22 and an intercept of -3.7% per year. The upshot, according to Ennis: endowments showed significant risk-adjusted underperformance, with 22% greater market-related risk.
“My research reveals the much greater extent to which public market pricing is reflected in the returns of private market real estate, private equity, and hedge funds since the global financial crisis (GFC),” Ennis said, maintaining that returns seen in stock and bond markets animate those observed among alternatives. “Consequently, there is neither reason (logic) to expect alts to be ‘risk dampeners’ nor evidence that they have been such since the GFC.”
