Failure of the Endowment Model

Failure of the Endowment Model
Nov 26, 2020 by Richard M. Ennis
Large institutional investors in the U.S. commonly diversify their portfolios among 8-12 asset classes. This approach typically involves using more than 100 investment managers at a cost of 1-2% of asset value annually. Sometimes referred to as the Endowment Model, the approach has failed to provide a diversification benefit and has proven to be a serious drag on performance. The vast majority of institutional investors would be better off managing their funds passively at next to no cost in the configuration that best accords with their risk tolerance and other preferences.

A Bad Year for Institutional Investors

Sep 04, 2020 by Richard M. Ennis
Most public pension funds and educational endowments report their annual investment results on a June 30 fiscal year basis. The year just ended was a bad one. These investors, in the aggregate, underperformed passively investable benchmarks by nearly 300 bps for the year, which is a wide margin by historical standards.

Endowment Performance

Endowment Performance
Jul 07, 2020 by Richard M. Ennis
In a recent Journal of Portfolio Management article, I examined the diversification and performance of large educational endowments and public pension funds in the U.S. over the decade ended June 30, 2018. In a follow-up paper (also included below), I provide further insight into the performance of educational endowment funds using updated returns through June 30, 2019. I find:
  • Endowment funds in the U.S. consistently underperform passive investment across cohorts of fund size. Significant underperformance is also observed in cross-sectional analysis of the returns of the largest individual endowment funds.
  • Alternative investments have failed to provide diversification benefits post-GFC and have been a drag on endowment performance.
  • Given prevailing diversification patterns, endowments’ investment expenditures of 1-2% of asset value simply overwhelm the opportunity to exploit asset mispricing.

Institutional Investment Strategy and Manager Choice: A Critique

Institutional Investment Strategy and Manager Choice: A Critique
May 18, 2020 by Richard M. Ennis
In a recent Journal of Portfolio Management article I looked critically at institutional investing in the U.S. I found:
  • Large public pension funds underperformed passive investment by 1.0% per year in the decade ended June 30, 2018. The underperformance of large educational endowments was of 1.6% per year.
  • The margins of underperformance closely approximate the respective (independently derived) cost of investment for the two fund types.
  • Alternative investments ceased to be the diversifiers they once were and became a significant drag on institutional fund performance.
  • Public pension funds are high-cost closet-indexers. The vast majority will inevitably underperform in the years ahead

Signature EnnisKnupp Advisory Themes

Sep 10, 2019 by Richard M. Ennis
Advisory themes played a vital role in the work of EnnisKnupp. We wanted all the clients to get the firm’s best thinking. As a means to that end we set out the firm’s position in various areas so that clients got the same advice, circumstances warranting. There were never more than 10 or so positions, or themes, most of which derived from our research and writing. We tried to put them down on paper from time to time, but that proved superfluous. The positions were forged in our internal discussions and day-to-day work. We knew them like we knew our own names. Here is a brief description of some of the most enduring EnnisKnupp advisory themes.

How to Sell Services

Jul 11, 2019 by Richard M. Ennis
In Never Bullshit the Client, I write about selling services, which is different from selling products. While I don’t claim to be an expert on selling services, I did learn a few things during my 40 years at it. This post explores what I have learned.

Big Bond Bust

Jul 08, 2019 by Richard M. Ennis
The following article was originally published in Financial Analysts Journal, Sep/Oct 2009, Vol. 65, No. 3: 6-8.

The Uncorrelated Return Myth

Jul 04, 2019 by Richard M. Ennis

The following article was originally published in Financial Analysts Journal, May/June 2009, Vol. 65, No. 3:6-10a.

Darwin and Investment Product Proliferation

Jul 01, 2019 by Richard M. Ennis
The following is adapted from the essay, “The Structure of the Investment Management Industry,” appearing in Financial Analysts Journal, July/August 1997, Vol. 53, No. 4:6-13.