After Shift to Passive Investing, Endowments Now Are Staying Put

  • Funds moved into the strategy in past three years, survey says
  • Consultant NEPC polled 74 U.S. endowments, foundations

Endowments and foundations have turned to passive investments after hedge funds disappointed with high fees and poor performance. Now, the plan is to stay put for the next 12 months, according to a survey.

More than 40 percent of business officers said they increased passive investment strategies in the past three years, according to the survey released June 5 by NEPC, a Boston-based consulting firm with 109 endowment and foundation clients with assets of $60 billion.

More than 50 percent of 74 endowments and foundations questioned said they plan to maintain their strategy in the next year. NEPC polled business officers of universities, foundations and other nonprofits in early May on their market outlook and asset allocation for the first quarter.

“People are being very rational about where they can go passive and where it makes sense to pay up for active management,” Kristin Reynolds, a partner at NEPC’s endowment and foundation research practice, said in an interview.

Reynolds said that those who are staying the course may reflect managers feeling optimistic about the U.S. economy, even if the outlook is slightly less rosy. Fifty-seven percent of those polled thought the U.S. economy was “in a better place” than a year ago, a slight decrease from those surveyed in the fourth quarter.

When asked about the greatest threat to their investment performance over the near term, 37 percent cited geopolitics and political uncertainty.

The biggest bets in the first quarter among the largest U.S. university endowments were in passive exchange-traded funds. Four of the five largest public purchases were ETFs, accounting for $1.2 billion traded, according to data compiled by Bloomberg. At Harvard University’s endowment, the biggest publicly traded holding was a high-yield bond ETF, according to a filing.

In the NEPC survey, lower fees were the biggest reason for the move into passive investments, followed by poor performance of active strategies. The study was the first time NEPC focused on active versus passive management styles among its clients.

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