Press

Higher education institutions saw strong returns across asset classes, especially in equities, and significant exposure to themes related to digital assets and artificial intelligence.

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Colin Hatton, a principal in NEPC’s endowments and foundations practice, explained that the firm still expects private market assets to provide strong returns.

“Over the long term, we still believe that private markets will outperform the public markets,” Hatton says. “However, we’ve seen that turnaround the last three years. If you look at a 10-year time period, those with heavy alternative allocations did outperform, and if you go back beyond that as well.”

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Hatton notes that because secondary sales lead to a decline in the value of the portfolio—because the assets are generally being sold at a discount—endowments are examining how the haircut will affect spending and distributions to the university.

“I think another thing that institutions are thinking about is how it will affect their spending if they go and do a secondary sale,” Hatton says. “The effect that that can have on the spending policy and the support for the institution is another consideration that these groups are having to think through as they go through this.”

In a year marked by political headwinds, budget cuts and volatile markets, U.S. colleges, universities and associated foundations scored positive returns for a third straight fiscal year.

As exchange-traded funds continue to become a bigger part of the investing landscape, institutional investors are using the vehicles more broadly.

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“Will Forde, head of marketable equities at NEPC, agrees that ETFs offer niche exposure and tactical opportunities in a way that is hard to replicate with other vehicles.”

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“ETFs can be easier operationally and cheaper to use than traditional index funds for NEPC’s smaller institutional clients, Forde says, since these smaller investors do not have the size and scale to negotiate favorable pricing.

Forde says his clients will use ETFs if they need to quickly implement tactical exposure, such as hedges. He also reports seeing them used for portfolio completion, such as if a client has a structural bias, like a country underweight. For taxable clients, ETFs are useful in tax-loss harvesting.”

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“Forde sees use cases for ETFs evolving as asset owners continue to get comfortable with the vehicle.

‘People get really creative with how to use things that even five or 10 years ago seemed pretty basic, but now they’re using them in different ways,’ he says.”

During one of Harvard University’s most challenging years, donors helped fund the endowment, which in turn supported the university’s operations.

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“A lot of educational institutions are struggling with balancing their operating budgets, and you’re seeing a number that are running deficits. In some cases, they’re using the endowment to help bridge that deficit,” said Colin Hatton, a principal at NEPC, where he advises endowments and foundations.

Hatton said endowments’ mounting contributions to university operations, in addition to rising inflation expectations, has many of his clients planning to increase their returns in the coming year. NEPC, he said, recommends funds do this through strategic asset allocation decisions, particularly by prioritizing an equity-centric portfolio, allocations to private markets and fixed income exposure, including private debt.

US investors reported a renewed risk appetite for the first time since July, along with an optimistic outlook for near-term equity market performance not seen since January.

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“There has been a lot of optimism built into markets despite some of the concerns around elevated valuations or geopolitics, so markets have been able to look through the government shutdown due to some of the tailwinds that have driven markets since April, such as accelerated rate cut expectations,” Jennifer Appel, senior investment director at NEPC, said in an interview.

Although the shutdown could become one of the longest for the government, markets are focused less on its duration and more on its economic impact, which should be minimal, Appel said.

“When thinking about economic growth, inflation or monetary policy, it’s hard to say that we’re going to see the 2025 shutdown derailing some of those tenets of the current environment,” Appel said. “We would expect this to be a pretty short-lived event for the market even if the shutdown itself is lasting longer.”

U.S. public pension funds chalked up a third straight year of positive returns for the fiscal year ended June 30, but unlike the prior two years, domestic equities was not the asset class that posted the highest returns.

Just as asset managers are moving to more user-friendly vehicles like ETFs, investment consulting firms like Cliffwater are pivoting to the retail and wealth space with an eye toward private assets.

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The other options consultants are taking to evolve in the current environment are to either go the OCIO route or partner with an established wealth manager — which NEPC did when it merged with Hightower last year.

“The institutional world has been under a lot of pressure for over a decade, and not just investment consulting,” NEPC’s chief investment officer Tim McCusker told II in September. “Everything except private markets has had a really tough time. And so those businesses, all different kinds, are looking for ways to grow.”

For NEPC, the main engine of growth for the last 10 years has been OCIO, going from zero 13 years ago to accounting for 30 percent of its revenue now. “And that will continue to grow for us,” McCusker said.

According to the NEPC investment chief, the institutional world has reached a plateau, where allocators have established their private market allocations, leaving only replacement growth. So, with long-term targets set in the institutional world, McCusker said that many advisors and managers are seeing the wealth market as “a place where we can serve and bring our advice.”

“I think the wealth market will be much better served having that than having advisors trying to advise their clients and do research at the same time,” McCusker added.

“Everyone in the space is looking at the wealth market and saying, ‘This is a place where we can serve and bring our advice.’”

A little over a year ago, the $18.5 billion Westwood Holdings Group entered the exchange-traded-funds business for the first time, with the launch of two active, energy-focused funds. Since then, the Dallas-based asset and wealth manager has expanded its lineup to 16 actively managed ETFs, now totaling nearly $200 million in assets.

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As opportunities in institutional dwindle, more asset managers are pivoting to retail. “The institutional world has been under a lot of pressure for over a decade,” said NEPC’s Chief Investment Officer Tim McCusker. “Broader investment management fee pressure, the lack of alpha generation, everything except private markets has had a really tough time.”