Foundations and endowments flock to long duration

The risk of a US equity market decline and concerns over the future direction of interest rates has been driving US foundations and endowments’ asset allocation decisions in the past year, with a distinct move away from US equity to global allocations and away from US-focused core to longer duration and high yield.

The latest investor trends report from eVestment shows the US foundation and endowment universe to be moving assets out of their largest allocations of US large cap value, core fixed income, large cap growth, interim duration fixed income and core plus fixed income.

As a result of the low-yield environment, these investors are increasing allocations towards cost-effective, passive, global equity exposures and higher-yield and longer duration fixed income. According to the eVestment report, in changing from low and interim duration US fixed income, these investors have allocated to funds which have been increasing their cash positions, reducing their yield to maturity, but also increasing average weighted coupon, portfolio maturity and duration.

Further these investors are favouring strategies that have shifted their portfolios away from AAA to BBB.

“In order to maintain a certain level of yield, they have been forced to move out on the credit spectrum. This is generally true for any non-alternative strategies that have operated with specific return expectations,” the report says.

It also says that allocations to the hedge funds industry have accelerated over the last three quarters.

Throughout 2013 there were large inflows to credit and multi-strategy funds and entering 2014 investors have heavily increased allocations to long/short equity and event driven strategies, all of which appear to be at the expense of manage futures and macro strategies.

“With multiple surveys illustrating interest in hedge funds, private equity and real assets, along with what have been large aggregate flows into alternative credit strategies, foundations and endowments have been active in searching for new sources of yield and return credit markets while also attempting to reduce exposure to directional movements in rate markets.