Top considerations for endowments and foundations 2025

19 Dec 2024

We identify the four considerations that we believe endowments and foundations should have front and centre as they look ahead.

Endowments and foundations (E&F) are increasingly grappling with a converging set of sector and market risks that require thoughtful navigation. Central to this is answering a fundamental series of questions including:

How should concentration risk be managed in global markets and are there opportunities to thoughtfully diversify?
How should investors balance short-term liquidity needs against current and future allocations to private markets?
How can long-term investment goals align with the organization’s values in a polarized world?

Our Themes and opportunities 2025 paper explores the forces playing out across portfolios over the next five years and beyond. Highlights include how institutional investors can prepare their portfolios to benefit from long-term opportunities while protecting capital from emerging risks. In recent years, investors have reacted to a number of surprises, including a global pandemic, heightened geopolitical tensions and the rise of AI. As the pressure from the shocks recedes, investors should consider how these events might affect their investments over the long term and how they can position portfolios to best achieve their goals.

In this paper, we address four top considerations that E&Fs should keep in mind coming into the new year:

Top investment considerations for endowments and foundations

Continued market concentration and lower expected returns for equities are two catalysts that point to the need for investors to review the diversification of their portfolios.

Today, much of the market’s growth and earnings are concentrated in a small number of publicly listed companies. This concentration risk creates the potential for volatility and complicates efforts to construct resilient, agile portfolios that minimize risk without sacrificing expected returns.
Many equity-biased investors have been rewarded in recent years given strong equity market returns. This is not expected to be the case for the long term. Many sources (including Mercer) have return expectations for equities that are lower than what has been achieved over the last 10 years. This presents challenges and a need to further ensure return driver diversification.

Diversifying into assets that provide uncorrelated return drivers - such as hedge funds, private debt, and defensive assets - can provide protection and a smoother return profile during volatile equity market environments.

Managing liquidity while maintaining exposure to diversifying asset classes remains a key challenge for E&Fs, particularly in asset classes like private equity, which as of late, have presented longer exit timelines and delayed distributions. However, this also offers up the opportunity for some investors to invest in many once-closed fund series’ and enhance their private market portfolio line-up. Additionally, by refocusing and reframing the structures underpinning portfolio allocations, E&F investors can balance typical closed-end primary strategies along with strategies that generally are prone to provide distributions earlier in their lifecycle – like secondaries, co-investments, and private debt, to ensure their portfolios align with their liquidity expectations without sacrificing long-term risk-adjusted growth potential.

E&Fs require a governance framework that drives and enables their long-term vision. Understanding how your organization manages its time and resources (the governance budget) and having direct conversations amongst the committee on governance can enhance long-term returns. There are a number of decisions that need to be made by the Committee and management to ensure the long-term success of an investment program. These decisions can include the portfolio’s time horizon, liquidity needs, and what success or failure may look like in a challenged market environment. Having a communal understanding of (and formalization of) these key strategic decisions is critical to ensure effective management of the program and optimization of the performance.

For those organizations interested, it is important for the board to hold conversations on how to achieve the dual goal of financial return and values alignment within investment portfolios. Regular deep dives into portfolio construction, with an emphasis on sustainability, can help organizations stay centered on long-term objectives and beliefs rather than reacting to short-term market fluctuations. By conducting annual reviews of their investment policy statement; incorporating assessment of performance over extended time horizons; and integrating values alignment considerations into strategic discussions, E&Fs can maintain a steady focus on their long-term mission.

Top considerations for endowments and foundations 2025

We identify the four considerations that we believe endowments and foundations should have front and centre as they look ahead.

Top investment considerations for endowments and foundations

Outsourced CIO (OCIO)

Risk management

Secondaries

Contact us to speak to an investment specialist

Top considerations for endowments and foundations 2025

We identify the four considerations that we believe endowments and foundations should have front and centre as they look ahead.

Top investment considerations for endowments and foundations

Broaden asset class exposure to ensure diversified returns

Evaluate opportunities to enhance private market programs

Optimize your governance budget

Ensure stakeholder voices are heard for values-alignment

Top investment considerations for endowments and foundations 2025

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