Building resilience for endowments and foundations in 2025 

Endowments and foundations are increasingly grappling with a converging set of sector and market risks that require thoughtful navigation. From market volatility and shifting economic conditions to evolving liquidity challenges, achieving portfolio resilience requires institutions to carefully balance risk, diversification, liquidity, and governance while remaining aligned with long-term mission-driven goals.

The strong performance of US stocks, driven by higher earnings growth projections and multiple expansion, has created a challenge for investors advocating for diversification, which is a core component of a resilient long-term investment strategy.

Despite the appeal of the recent US equity outperformance, a well-structured investment strategy should incorporate multiple asset classes, rather than it being a binary choice between US stocks and non-US stocks. Being well-diversified across other asset classes including fixed income, private markets, and other alternative investments, helps to ensure that investors are maintaining a disciplined approach to diversification, potentially allowing long-term objectives to remain the guiding principle, rather than following shorter-term trends.

Diversification is not just about geography; it also involves asset class exposure. Hedge funds and other alpha-seeking strategies can potentially provide uncorrelated returns, for example, accessing a wider range of opportunities through a market downturn to help reduce volatility through periods of stress.

Now, not all institutions can or want to invest in hedge funds, but even expanding fixed income allocations may provide more stability. Sub-investment grade credit strategies, for example, could offer lower sensitivity to interest rate movements while maintaining income generation. Additionally, a keen focus on equity allocations — analyzing growth biases and concentration risks — can help to ensure portfolios remain more robust in uncertain market conditions.

Liquidity management has become a focal point for many endowments and foundations, particularly considering inflationary pressures and the strength of the US dollar. With the slowing pace of fund distributions from private investments, helping ensure adequate liquidity to meet operational and grant-making needs is important.

Scenario analysis and stress testing can help institutions prepare for liquidity shortfalls by assessing the impact of adverse market conditions on their investment structures. Private market investments, while valuable for long-term growth, require careful liquidity planning. Investors may consider balancing their exposure between closed-ended funds (which lock in capital for extended periods) and open-ended ‘evergreen’ structures, which offer greater flexibility. While traditional private equity investments may be better suited to closed-ended funds, there are other options within private equity, such as secondaries and co-investments, which tend to have a shorter time horizon and so can help mitigate the illiquidity of an investor’s overall private market portfolio. 

Strong governance may be the unsung hero behind overall investment success. Clear decision-making structures, accountability, and alignment with organizational priorities help ensure that investment strategies remain focused on long-term goals.

Institutions with robust governance frameworks are better equipped to navigate market fluctuations. Developing an evaluation framework that distinguishes between short-term market noise and long-term structural changes is important.  Investment committees should establish clear protocols to assess the impact of economic and market events on their portfolios, helping ensure a proactive rather than reactive approach.

As endowments and foundations look to 2025 and beyond, building portfolio resilience requires a holistic approach. Diversification across asset classes, thoughtful liquidity management, and strong governance all play a role in helping ensure long-term success. But success may be achieved if an organization has established a clear set of investment beliefs that reflect their overarching purpose.

A well-articulated belief statement, developed at the board level, may serve as a guiding principle for investment decisions. Integrating sustainability and impact considerations into portfolio construction requires a structured approach, including defined objectives, metrics, and reporting frameworks. Regular engagement with stakeholders ensures alignment and transparency, helping to avoid reactionary decision-making and fostering long-term stability.

By maintaining discipline in their investment strategies and proactively addressing emerging challenges, endowments and foundations can potentially navigate uncertainty while helping ensure alignment with their purpose.