Endowment funds are very popular with high-net-worth investors and family offices. The name evokes images of Ivy League colleges, old family money and long-term legacy investing. There is a prestige associated with these investments. However, as with any investment, it’s crucial to approach them with caution —some are excellent, while others may fall short. Here are a few key considerations I focus on when evaluating endowment funds for my clients:

• Transparency Concerns: Endowment funds can sometimes be a bit of a “black box.” They often have a high allocation to alternative assets and frequently include the private bank’s in-house funds. It’s important to question whether every in-house fund is truly the best option globally. In my view, it’s difficult for a single institution to be strong in every single asset class. Some might argue with me differently.
• Illiquidity Risks: Due to their extended time frames, endowment funds tend to invest a much higher proportion of their funds in illiquid assets. That is fine as long as you are using the fund correctly in your overall asset allocation. However, if you’re overexposed, you might find yourself in a liquidity crunch.
• Fee Layering: Be cautious of the multiple layers of fees often associated with endowment funds. These can include management fees, administrative fees, and performance fees at the endowment fund level, along with additional costs of individual investment funds, such as private equity or hedge funds. Over time, these layered fees can erode the net returns of the endowment, significantly impacting your overall performance.
• Opaque Performance: Many endowment funds lack clear benchmarks, making it difficult to assess performance. Given their long-term focus, often described as managing money “in perpetuity,” it means if you are not carefully watching performance you can end up in a fund 10 years down the track that has not fulfilled its objective, and you have lost 10 years. It always pays to pay attention to performance.

Endowment funds can be great long term investments, but you need to remember you are there for the long term, potentially beyond your lifetime. It’s wise to be selective and conduct thorough, extended due diligence before making an investment and to keep your eye on performance to ensure that the fund is on track to meet your objectives in the long term.

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

General Advice Warning: Wealth Differently holds an Australian Financial Services licence to provide services to wholesale clients only. The information on this website is only for persons who are wholesale clients as per s761G of the Corporations Act. The information includes general advice which does not consider your particular circumstances and you should seek advice from Wealth Differently who can consider if the strategies and products are right for you. You should also understand that past performance is often not a reliable indicator of future performance and should not be solely relied upon to make investment decisions.

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