Simulations are also problematic, but allow for the testing of different scenarios while providing some insight into complex portfolio relationships. At Commonfund, we believe a strong equity orientation over the long run will allow most schools to meet their growth goals. The addition of diversifying strategies can do this while significantly lowering risk. There is no one right answer to the asset allocation question. But your Commonfund Relationship Officer can help in reaching a solution that is right for your institution.
Asset allocation is the hardest forward-looking decision for an endowment to make.
The process is hard because expected return has to be carefully weighed against multiple elements of risk, all in a portfolio context that has very little intuitive foundation. It is even harder for endowments than for most investors because of the ill-defined liability stream against which to target assets. When liabilities are known with certainty, the process is much easier. Both my daughter and the University of Michigan should feel better with the knowledge that her next two years' tuition and expenses are in a savings account. Defined benefit pension plans also know what they are shooting at.