1. The endowment and foundation sector is at
the forefront of innovation in the investment
industry. Industry players are accelerating their
move into alternatives to drive performance
and diversification in an era of low interest
rates. At the same time, they’re updating their
existing technology to support more sophisticated
investment strategies.
A State Street survey of 170 endowment and
foundation funds, conducted by the Economist
Intelligence Unit, reveals how the industry is evolving.
It shows how industry leaders are taking a more
proactive approach to investing so they can prosper
in an increasingly challenging environment.
Invest to perform
Our research suggests that many endowments and
foundations are now broadening their portfolios and
also pursuing a risk premium. For example, more than
half (52 percent) of funds expect to ramp up their risk
appetite over the next three years, as the search for
returns intensifies.
Investment allocations are shifting accordingly. Three-
fifths of endowments and foundations in the survey
(62 percent) see increased investment opportunities
for their institutions in emerging markets, with
18 percent believing there will be a strong increase
in these opportunities. While some endowments were
early advocates of greater diversification and higher
allocations to some alternative assets, alternatives are
becoming an even more important piece of their future
strategy. Thirty-eight percent expect to increase their
existing allocation to infrastructure, while 26 percent
plan to increase their allocation to private equity, and
another 20 percent plan to invest there for the first time.
This shift into alternatives comes against the backdrop
of preliminary data from the 2014 NACUBO-
Commonfund Study of Endowments (NCSE)1
. The
NCSE shows that over the last 10 years, US college
endowment funds have seen an average return of
7.1 percent. This is below their average long-term
growth target of 7.4 percent. However, annual returns
Expectations for investment risk appetite
Source: State Street 2014 Asset Owner Survey, conducted by the Economist Intelligence
Unit (170 respondents from endowments and foundations)
A Hands-on Future for
Endowment and Foundation Funds
Executive Summary
■ Decrease significantly
Over the next year Over the next three years
■ Decrease slightly
■ Stay the same
■ Decrease significantly
■ Increase slightly
10%
27%
4%
58%
1%
25%
27%
4%
43%
1%
1
2014 NACUBO-Commonfund Study of Endowments, November 2014.
http://www.nacubo.org/Documents/about/pressreleases/2014_NACUBO-Commonfund_%20Study_of_Endowments-Preliminary%20Data.pdf.

2. 2
Executive Summary
A Hands-on Future for Endowment and Foundation Funds
need to hit about 9 percent for endowments to grow,
once their typical yearly spend is factored in.
The preliminary results of the NCSE also found
that larger, better-diversified endowments have
outperformed their smaller, equity-heavy peers for the
first time since 2012. The large funds, with $1 billion or
more, returned 16.8 percent, outperforming the overall
average of endowments at 15.8 percent. This stronger
performance is largely attributed to a continued shift
from public equities and fixed income into alternatives.
The NCSE also shows allocations into alternative assets
increasing from 53 to 58 percent overall, and schools
with $1 billion or more increasing their alternatives
allocations from 58 to 65 percent.
Diversification brings clear benefits — but this
trend is challenging existing operating models in the
industry. Only 11 percent of our survey respondents
report strong confidence they have the operational
infrastructure in place to accommodate such changes
to their portfolio. “These entities are looking for
technology that can give them a view into all their
alternative asset classes — hedge funds, private equity
and real estate — in a user-friendly portal, but to date
that need hasn’t been fully met,” says Chris Sadler,
State Street vice president, Asset Owner Servicing.
Defining a new relationship with
asset managers
As endowment and foundation funds seek to take a
more hands-on approach to investment management,
they are looking for asset managers who can deliver
solutions that are aligned with their long-term investment
objectives and can offer a competitive edge.
Our survey shows that improving due diligence
in manager selection remains top of mind for
institutional investors in this sector. Fifty-six percent
say conducting due diligence post-hire to ensure
managers are meeting their expectations is a
challenge, while 51 percent say due diligence is
a challenge when hiring new managers too. “We’re
looking for asset managers who have some kind of
edge, but you need to do the due diligence,” says the
chief operating officer of a US university endowment
fund with more than $2 billion in assets. “It’s not
enough to look at a manager’s track record — how
much of that track record comes down to market
conditions, and how much is attributable to skill?”
Along with other institutional investors such as
pension funds and insurance companies, endowments
and foundations are searching for greater transparency
from external managers around performance and
risk. Almost half (46 percent) of those in our survey
say they struggle to obtain a complete picture of risk-
adjusted performance from their managers.
Funds in the endowment and foundation sector are
increasingly looking at the advantages of in-house
management, partly to provide them with greater
visibility of risk and to reduce costs. Nearly one-third
(32 percent) say they’re planning to increase the
proportion of their assets managed in-house. Sadler
agrees, “Some endowments and foundations are
starting to manage more assets internally, such as
futures, swaps and swaptions.”
A more hands-on approach to governance
Endowments and foundations will not only need to
be more proactive in how they manage investment
performance in the future, but also in how they
handle governance.
Challenges experienced in past year with external managers
Source: State Street 2014 Asset Owner Survey, conducted by the Economist Intelligence
Unit (170 respondents from endowments and foundations)
■ Major challenge ■ Minor challenge
Conducting due diligence post-hire to ensure managers
are meeting our expectations
28% 28%
Conducting due diligence when hiring new managers
22% 29%
Gaining a complete picture of risk-adjusted performance
20% 26%
Ensuring their interests are aligned with ours
17% 35%
Justifying the fees
11% 28%

3. 33
Executive Summary
A Hands-on Future for Endowment and Foundation Funds
Regulatory pressure continues to intensify. According to
Rebecca Schechter, State Street senior vice president,
Asset Owner Servicing, “While the endowment and
foundation sector has felt increased regulatory scrutiny,
this is expected to continue apace.”
Internal governance structures are also being
reviewed. More than half (56 percent) of global
respondents believe their increasingly sophisticated
portfolios will require a change in their trustees.
“A board may have one trustee saying, ‘Give me a
synopsis with pie charts that gets to the heart of the
matter,’ and another saying, ‘I need to drill down into
the data that supports the synopsis to form a better
understanding of our situation,” says Martin Sullivan,
State Street head of Asset Owner Solutions.
To get ahead of the market, endowments in particular
are getting far more granular on risk. “Investment
committees and boards are becoming more hands
on, and their level of sophistication is growing,”
says Schechter. “As a result, investment teams are
consuming data daily and pushing harder for daily
updates around risk exposures.”
As they seek to satisfy greater reporting requirements
from regulators and their boards, endowment funds’
IT infrastructure is a vital success factor. In our
survey, 41 percent of endowments and foundations
Daring to be different
Endowments and foundations are highly competitive
with one another, and they’re often willing to take a
different approach to other institutional investors.
The largest university endowments in the US are
competitive, and the freedom given to their chief
investment officers (CIO) often puts them in a
unique position.
“The CIOs of the largest endowments are leaders
in the industry. They’re willing to take a different
approach,” says Sadler. “Some managers are
dramatically increasing their number of separately
managed accounts. They’re hiring a lot of different
managers, giving each of them small amounts
to invest.” This approach, however, creates
infrastructure support needs, as some of these
managers are effectively very tiny shops.
At the same time, university endowments can tap
into vast internal expertise and have the ability
to invest for the longer term, both of which bring
advantages. “Some of the major universities are
willing to work with new technology solutions and
software companies to enhance their solution,”
notes Sadler. “They’re also willing to do things
in-house as they feel they have access to more
expertise than may be available externally.”
Responsible choices
Among foundations in particular, there’s also a
growing emphasis on pursuing sustainable and
responsible investment approaches in the post-
crisis environment. The idea that investment
strategies across assets can help to achieve
positive societal outcomes and deliver targeted
financial returns is gaining greater traction in the
sector. As an example of this trend, in 2012, the
US SIF Foundation identified 95 foundations in
the US that applied some form of environmental,
social and corporate governance (ESG) criteria to
assets — collectively totaling $60.3 billion2
.
2
Unleashing the Potential of US Foundation Endowments, US SIF, January 2014.
http://www.ussif.org/files/Publications/unleashing_potential.pdf.
Areas prioritized for improvement over next three years
Source: State Street 2014 Asset Owner Survey, conducted by the Economist Intelligence
Unit (170 respondents from endowments and foundations)
■ High priority ■ Medium priority ■ Low priority
Regulatory compliance
58% 33% 9%
Overall governance
44% 45% 11%
Data management
41% 36% 24%
Contingency planning
31% 49% 20%
Cybersecurity
25% 30% 45%

4. www.statestreet.com
4
Executive Summary
A Hands-on Future for Endowment and Foundation Funds
©State Street Corporation
cite better data management as a high priority. They
also recognize that a broader perspective on risk
management is needed, encompassing contingency
planning such as disaster recovery and business
continuity, and emerging cybersecurity threats. One
quarter of our survey respondents say cyber security
is now a high priority.
Looking to the future
As they respond to changes in both their external
and internal environment, endowments and
foundations will increase the complexity of their
portfolios by deepening their reliance upon
alternatives and moving into new markets. At the
same time, they’re under pressure to deliver
more granular risk and performance reporting to
increasingly knowledgeable and specialist investment
committees and board members.
Many of the larger endowments already possess
the investment know-how to thrive in this hyper-
competitive marketplace. However, they’ll need to
develop specialist talent, advanced technology and
new governance frameworks to help them navigate
the new terrain that lies ahead.
About the research
On behalf of State Street, the Economist Intelligence
Unit conducted a global survey of institutional asset
owners during July and August of 2014. The survey
garnered 170 responses from endowment and
foundation executives globally, spanning public and
private institutions.
Risk associated with equity investing include stock values that may fluctuate in response to the activities of individual companies and general market and economic conditions. Investing
in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting
principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed
markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems that have less stability than those of more developed
countries. There are risks associated with investing in real assets and the real assets sector, including real estate, precious metals and natural resources. Investments can be significantly
affected by events relating to these industries. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities. It does not take
into account any investor’s particular investment objectives, strategies or tax status. All material has been obtained from sources believed to be reliable, but we make no representation
or warranty as to its accuracy and you should not place any reliance on this information. The information provided does not constitute investment advice and it should not be relied on as
such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or
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Endowments and foundation respondents by region
Source: State Street 2014 Asset Owner Survey, conducted by the Economist Intelligence
Unit (170 respondents from endowments and foundations)
Endowments and foundation respondents by investable assets
Source: State Street 2014 Asset Owner Survey, conducted by the Economist Intelligence
Unit (170 respondents from endowments and foundations)
21%
35%
44%
■ Americas
■ EMEA
■ APAC
13%
22%
65%
■ Less than $100m
■ $100m – $499m
■ $500m or more