Over the past 10 years, IRF portfolios have seen a shift in asset allocation to a more growth-oriented overall strategy. While IRFs across all size cohorts reduced the allocation to marketable alternative strategies, there was far less uniformity in how those assets were reallocated. The shift in allocation was dependent on the size of the endowment portfolio. Smaller-sized endowments tended to increase their allocation to public equities. In contrast, larger endowments continued to favor private investments, particularly private equity, more than doubling their allocation to that asset class over the past decade.
The observed trend with asset allocation is directly related to how IRFs foresee their own portfolio’s ability to generate the returns necessary to maintain the purchasing power of their portfolio or achieve intergenerational equity. The decision to increase allocations to growth-oriented asset classes may indicate a recognition from IRFs that there is a greater need on their endowment for financial support and stability, but also a greater understanding of the endowment’s ability to take risk to generate the necessary returns.
The chart below compares how each size cohort was allocated 10 years ago with how they are allocated as of this past fiscal year.
Capital market returns across public and private strategies in recent years have been nothing short of robust. U.S. equity markets posted back-to-back double-digit calendar year returns. This favorable environment, combined with the increased risk taken by IRF endowments (as previously discussed), helped drive attractive total returns over the past decade. However, the investment objective of IRFs extends beyond simply growing the portfolio through strong nominal investment returns. The primary goal is to grow the portfolio's corpus at a rate that exceeds its own spend rate plus inflation.
As shown in the graph below, IRF returns in FY2020 and FY2021 exceeded a traditional return objective of inflation plus a 5 percent spend. This outcome was aided in part by a decade-long period of subdued inflation following the global financial crisis, during which inflation—as measured by the Consumer Price Index (CPI)—consistently remained below its long-term average of 2.5 percent.
This dynamic shifted in FY2022 as inflation surged to levels not seen in decades, peaking at 9.5 percent in the aftermath of the pandemic. Elevated inflation made the return objective of IRFs harder to achieve. As the chart highlights, despite continued solid nominal returns in fiscal years 2022, 2023, and 2024, the 10-year return of IRF endowments has fallen short of their long-term objective of exceeding inflation plus spend.
Key to the operational success of an IRF is how they are able to generate revenue through the application of an administrative fee. These fees are typically assessed relative to the size of the IRF portfolio on an annual and ongoing basis. A question in the FY2024 NCSE asked respondents if their institution charges an annual fee to the endowment to cover administrative, fundraising, and other costs. The data show that while almost all IRFs do charge an annual fee, the range of the fee can vary substantially from about 1.0 to 1.5 percent. We get a better look at the data when segmenting responses by size cohort. Smaller IRFs were shown to typically have a higher administrative fee than the larger foundations. In Commonfund’s experience, the unique operating environments and funding sources of each IRF naturally lead to varying fee structures across organizations.
After presenting the findings of the study, we turned the meeting over to the attendees who had the opportunity to ask questions, share anecdotes, and provide insights into their institutions and challenges they are facing in their daily operations.
While we encouraged attendees to use the presentation as a catalyst to start their table talks, we hoped that it served as merely a starting point. Discussions went beyond the data and illuminated other key issues at their institutions.
Our goal for this convening was to provide a platform for these institutions to share ideas and gain new insights into key governance practices that they can implement at their respective organizations. Our hope is that it served as the basis for more informed discussion and debate with their board, committee members and investment managers over the next year.