Higher alts allocations providing equity performance buffer for institutions

The BNY Mellon U.S. Master Trust Universe found in its peer comparisons of pensions, endowments and foundations that asset allocations pack a mighty performance punch. The median return of the BNY Mellon U.S. Master Trust Universe was 10.68% in the second quarter, which nearly erased the 10.9% loss suffered by plans in the first quarter of 2020. According to BNY Mellon, U.S. equities were up 19.6% -- driving returns in many institutional investor portfolios. While alternatives may have fallen behind in the second quarter generally, for the most part they have offered a safe haven amid market volatility. “In a study we recently conducted on performance and asset allocation trends of endowments and foundations, we saw asset allocation weights having the opposite effect on performance. E&Fs with more than $1 billion in assets suffered performance-wise in the first quarter of 2020 with higher allocations to public equity, whilst their larger peers, who tend to have higher allocations to alternatives, were somewhat cushioned from the market volatility,” said Frances Barney, head of global risk solutions at BNY Mellon. In their 2020 endowment and foundation survey, BNY Mellon’s team said that U.S. endowments and foundations showed an average performance return of 15.02% for the 2019 calendar year, and then a return drop of -10.5% in the first quarter. Smaller endowments and foundations underperformed their peers by 1.93%. Hedge funds returns were eye-opening with sub-$1 billion endowments seeing their hedge fund performance drop to -11.5% in the first quarter and the largest endowments seeing performance of -6% in their hedge fund portfolios. Private equity saw gains of 2% over the first quarter, while real estate saw -3% returns over the same time period for this same grouping of 93 endowments and foundations. More importantly, U.S. equity portfolios saw dire returns of -21% for the first three months of the year. Another investor survey this week from data firm Preqin found that 93% of investors over the long-term plan to increase their allocations to alternatives. Still alternatives are overshadowed by equities and fixed income within institutional investors asset mixes overall. Of the total market value of BNY Mellon’s $2.1 trillion U.S. Master Trust Universe, private equity accounts for 9.63% of assets, real estate 5.52% and real assets 2.14%. Each alternative asset class saw a slight bump up or maintaining in its median asset weighting in investors’ portfolios in recent years, according to BNY Mellon’s figures, with the notable exception being hedge funds. These strategies overall position in institutional portfolios has dipped from it's standing five years ago of 15.05% to only 11% of assets today.

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