Our endowment-style investing approach
This video explores the heritage of WTW's endowment-style investment approach working with Oxford University endowments.
In this video, Paul Berriman, Global Head of Towers Watson Investment Management, explores the heritage of WTW's endowment style investment approach working with Oxford University endowments.
Paul outlines the benefits inherent in the pooling of capital. Economies of scale can mean more favourable pricing. A larger pool of capital provides access to a broader investment opportunity set beyond just equities and credit, which could include private markets, infrastructure, hedge funds and different types of real estate. This diversification can prove critical for a smooth path, particularly in times when both equities and bond markets go down in synch, as we have seen recently. Paul highlights the value of skilled risk management and understanding the impact of risk in your portfolio across different economic scenarios.
If you are considering ways to improve the performance of your portfolio and meet your financial goals, the endowment style of fund management could be the right solution for your organization.
Video transcript
Endowment Style Investing with WTW
0:05
Hi, my name is Paul Berriman and I'm the Global Head of Towers
Watson Investment Management.
0:11
Today I'd like to tell you about how we got involved in
endowment style fund management, and more specifically, why we
argued, and we still do argue, that the pooling of capital is
probably the most efficient way to get the best from that style of
fund management.
0:28
The story begins in Oxford 20 years ago.
0:31
Now.
0:32
Oxford is a very federal university.
0:34
There are 39 colleges and each of them is independent, which in
turn means that each of their endowments is managed independent of
the others.
0:44
There are benefits to doing things that way.
0:47
It means ultimately you're responsible for the performance of
your own endowment.
0:52
Goes well, goes badly, the buck stops with you.
0:56
There are, however, we argued a number of downsides to doing things
that way and that was the message that we delivered to those
colleges and the people responsible for managing the
endowments.
1:07
Firstly, we said broadly speaking, your return targets and your
risk measures are quite similar.
1:14
You all want to grow well in excess of inflation over time.
1:18
4 or 5% more was the target return, but you also have spending
needs and therefore to try and dampen down the volatility of
return, particularly when equity markets perform poorly was equally
important.
1:33
So broadly, the risk return characteristics quite similar.
1:37
The things we felt that they were missing out on were essentially
three in number, the first economies of scale within our
industry.
1:46
It's always going to be cheaper to manage more, not less.
1:50
The prices you'll get from fund managers will be lower almost
inevitably.
1:55
If you're managing a billion pounds relative to 100 or even 10,
and the average size endowment at that stage was about 40 million
sterling.
2:04
They simply weren't benefiting from those economies of
scale.
2:09
Secondly, the broad opportunity set, the larger the pot of money,
the broader the opportunity set will get.
2:17
Most of those endowments were managed with the combination of
equities and bonds, maybe a little bit of real estate.
2:24
And we argued that by broadening out the opportunity set to
include, for example, private markets, infrastructure, other types
of real estate, hedge funds and other diversifiers was a good
thing.
2:38
If you have 8 or 9 levers to pull, then probably over time
you're going to do a better job than just having 1-2 because
there are periods of time, we've experienced one in the last
two or three years where both equities and mainstream bond markets
go down in sync.
2:55
Finally, risk management, managing a multi-asset growth portfolio
and understanding the types of risks you're taking is actually
a bit more complicated than many of them may be understood at the
time.
3:08
If you take, for example, the equity risk premium, of course, you
have some of that in public equities.
3:13
You may have some of that in your long short equity portfolio and
you absolutely do have some in your private equity.
3:21
But trying to determine quite how much, that's easier said than
done.
3:26
And it's clearly very important because if you're looking
at the totality of equity risk in portfolio and how that might
perform across a range of economic scenarios, that's something
you absolutely need to know.
3:38
So that was our proposition to them 20 years ago and things broadly
speaking have worked out well.
3:44
We're happy to have relationships with many of those colleges
today.
3:49
The final point I'd leave you with is that the applicability of
endowment style fund management and we believe this strongly
doesn't end with universities.
3:58
It's something that other types of long-term institutional
investors should also be interested in, people like foundations,
family offices and charities.
4:08
We think that they all should take a look at this way of improving
over time the quality of the portfolio that they own and the
likelihood of that portfolio achieving its risk and return
objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
