If you wanted to judge foundations & endowments (F&E) sentiment by holdings, you would get the idea that they are most bullish on US equities and fixed income products, where their portfolios are and have been overweight. But fund flows change the picture significantly, as F&E have been allocating assets away from all of their largest holdings for the last four quarters as they move on from a tired bull market and seek higher yields abroad.
“To face a low-yield environment with an uncertain outlook, foundations & endowments appear to be actively shifting portfolios to cost-effective global equity exposure and seeking higher yields and longer duration fixed income,” says the recent eVestment report Investor Trends Report: Foundations and Endowments.
One of the most striking changes in the last year and a half has been the reduction in AAA-rated bonds in favor of BBB, skipping past AA and A as foundations & endowments look for ways to increase their risk exposure. You would expect this behavior from defined benefit pension funds that have to generate enough income to meet their liabilities, but foundations & endowments portfolio managers are apparently also under enough pressure to meet investment goals that they have to reduce the overall credit quality of their holdings.
Foundations & endowments yield-to-maturity, duration both changed direction last quarter
Foundations & endowments have been increasing their cash holdings for the last two quarters, which makes sense if you think the chances for a correction are increasing and want to keep some dry powder to by discounted stocks if the opportunity arises, and some of the increased risk in fixed income holdings could be meant to offset the larger cash reserves. F&E portfolios have increased the weighted average coupon of their fixed income holdings for most of the last year as well, while average yield-to-maturity and duration both changed direction last quarter (falling and rising respectively), again showing that F&E are busy repositioning themselves as their view of the US market changes.
Foundations & endowments regional weight shifting from EM to EU
With the expectation that the European Central Bank would eventually turn to accommodative monetary policy (which came to fruition earlier this month), Foundations & endowments pensions also re-allocated a large part of their fixed income portfolios from emerging markets to Europe. By now the growing appetite for EU sovereign bonds is old news (how else to explain why Spanish yields recently fell below US yields), but F&E were already shifting their relative weight months ago.