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Clearing hurdle targets amid rising rates
Bridging the gap amid rising rates and inflations
For much of the past decade, the endowment and foundation community has expressed concerns about the challenge of meeting their spending requirements while maintaining funding levels in an environment of low yields and muted return expectations. This challenge, in many ways, has become even more daunting over the past year. Endowments and foundations must now grapple with increasing inflation expectations, the impact of rising interest rates and new pandemic-related spending pressures facing many of the institutions’ endowments and foundations support.
The 2020 NACUBO-TIAA Study of Endowments provides a fascinating window into the asset allocations, investment performance and spending decisions of higher-education institutions at this unique point in history. The report includes data from 191 endowments with more than $500 million in assets (which we refer to hereafter as large institutions) and covers the fiscal year ending 30 June 2020.
In setting their long-term return requirements, large institutions anticipated needing, on average, 4.7% to cover spending, 2.3% to meet long-term inflation expectations and 0.9% for fees and expenses. These three primary components add up to a hurdle rate of 7.9%. This is meaningfully higher than the 7.5% that is commonly cited as the typical hurdle rate for endowments. Unfortunately, the median five-year annualized return for large institutions in FY2020 was only 5.0%, and top-decile returns were just 6.6%.
Bridging this gap will require endowments and foundations to be more efficient in their search for diversified sources of return, while using all the levers at their disposal related to risk budgeting, liquidity management and rebalancing. In a rising-rate, inflationary environment, it is critical that endowments and foundations understand their portfolios’ exposure to the primary factors that drive return: rates duration, credit, equity beta and idiosyncratic.
In this Q&A, Nuveen’s Nathan Shetty looks at how endowments and foundations can optimize their approaches to portfolio construction, capitalize on current opportunities and enhance their ability to fulfill their spending goals.
About the 2020 NACUBO-TIAA study of endowments
The annual report analyzes the financial, investment and governance policies and practices of the nation’s endowed institutions for higher education. The 2020 report reflects the responses of 705 institutions representing $637.7 billion in endowment assets, including 191 institutions that have at least $500 million in endowment assets. For the purposes of this report, we focus on the survey results reported by these large institutions.
The statements contained herein are based upon the opinions of Nuveen and its affiliates, and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information and opinions discussed in this commentary may be superseded and we do not undertake to update such information. This material is provided for informational or educational purposes only and does not constitute a solicitation in any jurisdiction. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen has been included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved by any Nuveen funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. They do not necessarily reflect the views of any company in the Nuveen Group or any part thereof and no assurances are made as to their accuracy. Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate.
Risks and other important considerations
This material is presented for informational purposes only and may change in response to changing economic and market conditions. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. Certain products and services may not be available to all entities or persons. Past performance is not indicative of future results.
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