The endowment is the lifeblood of the higher education institution. While only 5% of total asset value is typically spent by the endowment annually, the size of that 5% impacts tuition rates, staff salaries, campus programs, new construction, and other initiatives that directly impact a college or university’s reputation, student experience, and potential enrollment. The investment operations and analysis teams tasked with upholding the endowment’s mandate and generating consistent portfolio performance consequently hold the weightiest responsibilities within the entire institution.
These responsibilities have been made more difficult in recent years. Global Investor Magazine reported that the top tracked US endowments produced negative returns for the second straight year. While single-year returns matter less due to endowments’ focus on long-term performance, Pensions & Investments reported in October that “sources expressed concern about endowments’ ability to stay apace with their expected rate of return while trying to meet university spending rates” and that Mercer Investments’ return forecasts through the next seven to ten years are pessimistic.
Endowments need to acknowledge these forecasts and address the implied challenges by ensuring that a comprehensive due diligence process is consistently executed across all potential allocations, ensuring that their exposure is properly understood to mitigate risk during future investments. Darius Grant, the head of endowments and foundations at RiskFirst, states that, “It’s crucial that endowments look at how they integrate investment ideas, manager selection, economic prognosis and financial management into a holistic and coherent investment strategy.” Establishing a technology-based foundation for crucial investment management processes is a natural step for ensuring investment research is consistently stored for easy retrieval and provides highly-informed positions during asset allocation.
By taking a long-term, big picture perspective when evaluating their investment strategy, an endowment should also take a similar approach to their technology adoption. Excel and Outlook may suffice for smaller endowments in order to perform fund manager due diligence, investment research, and portfolio tracking, but as assets under management expand, managing the volume of aggregating and normalizing incoming data becomes overwhelming. Industry-specific investment management software leverages Excel and Outlook integration, as well as configurable relationship management features, to place all key fund manager data in a single, Cloud-based platform, and relates this information to all relevant records for intuitive retrieval. Operational due diligence teams’ ability to access, share, and continuously update information in a consolidated system ensures optimal context for engaging in relationships with fund managers. Software tailored to the alternative industry goes a step farther and intelligently automates incoming data into the appropriate profiles, eliminating manual data management and freeing up more time to closely examine fund manager offerings.
Industry-specific investment management software provides research capabilities beyond data import from Microsoft Office software. These platforms, supported by extensive feedback from limited partner clients, incorporate integrations with the alternative investment industry’s top data providers, such as Bloomberg, Factset, and Preqin. These integrations enable institutions to compare their performance against industry benchmarks, and review premier industry intelligence, within a centralized system. Dedicated investment management software also empowers institutions to track a fund manager’s time series performance and related benchmarks, delivering more in-depth insight on general partners.
Effectively managing exposure across asset classes, geographic regions, and industries is essential for driving stable performance. Opting into an investment management software system that can dynamically slice, dice, and present an institution’s exposure levels is invaluable for both reducing potential risk and identifying lucrative allocation opportunities. My colleague CT McLean further explains the utility of portfolio exposure management software in a prior post, but adopting comprehensive software that provides due diligence, investment research, and portfolio analysis functionality saves significant time and manual effort for the entire institutional investment team.
Investment management software is a considerable up-front expense, but can create a sustainable operational process that enables an endowment to maximize time on mission-critical initiatives that maintain the institutional mandate and optimize returns. While standardized office software works well in the short term, a centralized system preserves intellectual capital, simplifies onboarding for new staff, and can serve as a key driver for the continued health of your portfolio.