Creating an optimal portfolio for an endowed non-profit institution is difficult. For asset allocators or outsourced CIO (OCIO) firms such as TIFF, we would list a few critical tasks as necessary to achieving success. The first is defining a policy portfolio, or benchmark, that enables the asset manager to outperform an endowed non-profit’s long-term annualized return goal, such as CPI +5%. The second task is finding and partnering with managers who can add excess return or “alpha” over reasonable time frames. The final task is combining these alpha-generating managers in a way that produces sufficient return streams without taking undue risk. Employing a benchmark targeting returns that are too low to achieve the CPI + 5% objective or so high that they introduce excess volatility into portfolios can result in long-term underperformance. Such lagging performance can also result from partnering with managers who don’t add meaningful alpha, net of fees, or from combining good managers in a sub-optimal fashion. The best portfolio managers go “three for three” on these vital tasks as they work to support your spending policies and foster effectiveness in reaching your endowment or foundation goals.
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