The small endowment market has become an area of fierce competition for fund managers, banks, consultants and retail boutique financial advisory firms. Charles Skorina, an executive recruiter in San Francisco who writes a popular newsletter covering the endowment sector, wrote that there are now almost 80 investment firms that are dedicated to capturing this business, which has grown to nearly $100 billion. “It's just such an incredibly crowded space. By definition not everyone is going to stay in and win and get the scale,” Kevin Quirk, a principal at Casey Quirk by Deloitte, a management consultant to fund companies told Investment News.
Endowment assets comprise only a small slice of the $53 trillion investment market, but this has been an area of growth for active fund managers, who are currently facing new competition from the explosive growth of passively-managed investment offerings and automated robo-advisors. In addition to the funds that they hold directly, foundations, family offices and schools offer access to wealthy individuals that act as trustees and benefactors for these organizations. And a growing number of them are outsourcing the management of their funds to investment management firms. (For more, see: How to Invest Like an Endowment.)
Examples of this include Kenyon College in Charlottesville, Virginia, which just hired CornerStone Partners to manage its $218 million foundation following the retirement of their chief investment officer. Oregon State University also asked 15 entrants to bid on managing its $500 million fund. And the University of the South picked Edgehill Endowment Partners out of six bidders to replace JPMorgan Chase & Co to manage its fund. John McCardell, president of the liberal arts school told Investment News, “I think we're going to be very well served. Just look at the track record of the principals.”
Outsourcing firms are targeting endowments that may currently be managed by investment committees that are comprised of volunteers or that may be struggling to manage funds that have sophisticated or alternative investment offerings such as private equity, derivatives or hedge funds. In some cases, the internal staff that is employed to oversee these offerings are not qualified to do so.
Smaller endowments have led the way in the outsourcing trend, but larger players are also starting to get in on the act. George Washington University closed down its internal investment office and replace its CIO with Strategic Investment Group of Arlington, Virginia to oversee its $1.6 billion fund. Surveys from the National Association of College and University Business Officers and Commonfund revealed that $100 billion has been outsourced thus far, more than double the number back in 2010. (For more, see: Top 5 Largest University Endowments.)
It has been difficult to gauge the performance of many of the fund managers who have taken over endowment fund management. A lot of the newer players in this field have no prior experience at managing these funds, despite their promise of access to a better selection of fund managers. Bloomberg contacted over a dozen of these entrants but was unable to obtain any performance history from any of them. They also refused to divulge how much they are charging their new clients. However, some of the schools said that a few of the higher-end money managers were charging them over a point on an annual basis.
The Bottom Line
Public and private endowment funds are providing outsourced fund managers with the opportunity to capture huge assets, and a growing number of retail firms and conglomerates are vying to get their share. This shift to outsourced management allows those who oversee these funds to concentrate on other activities and leave the fund management to experts. (For more, see: David Swensen vs. Stephen Blyth: Tale of the Tape.)