Endowments and foundations are investing largely untethered to their stated goals and risk preferences, according to a recent report.

CAPTRUST’s 2018 Endowment and Foundation Survey found a lot of variety in asset allocation among respondents, and asset allocation “was not necessarily tied to return and risk objectives.” CAPTRUST reports that the most conservative responses respective of loss aversion tended to have the more aggressive asset allocations, while respondents with more moderate risk tolerances tended to have more conservative asset allocations.

This mismatch could be due to where endowments and foundations source the majority of their financial advice. While over half of the respondents, 53 percent, reported using a registered investment advisor as a consultant to their portfolio, 40 percent rely solely on investment advice from their asset managers.

As it stands, the median respondents invested 60 percent of their assets into equity – 40 percent domestic equity and 20 percent international, 27 percent of their assets into fixed income, 2 percent of their assets into cash and another 5 percent of their assets into “other” asset classes like alternatives.

Most investment managers for endowments and foundations plan to reduce their allocations to U.S. equity, but increase their allocations to international equities. CAPTRUST found that respondents were more likely to be undecided when it came to ESG and impact investing and deploying alternatives within their portfolios. A minority of respondents indicated that they employed some form of ESG investing. The survey participants most commonly favored real estate over other alternatives.

Four-in-five respondents reported using mutual funds, with fewer than half using separately managed accounts or individual securities, and fewer than 30 percent using collective trusts or limited partnerships. Large organizations with endowments of more than $100 million were just as likely to employ mutual funds as smaller organizations with less than $25 million in assets.

While some respondents reported investing 100 percent of their assets in indexed portfolios, endowments and foundations were more likely to employ active managers. Respondents indicated that they were leaning towards increasing their exposure to index funds. Fewer than half of the respondents employed tactical asset allocation within their portfolios.

When asked about their chief concerns, respondents most frequently cited lower future return expectations and market volatility.

Most of the survey respondents target annual spending levels between 4 and 6 percent, with 2017 spending generally in line with their target policy. According to CAPTRUST, there were more organizations spending less than policy than there were organizations exceeding policy.

For the five-year period ending Dec. 31, 2017, the respondents reported a median net-of-fees investment return of 7.2 percent. Moving forward, more than 72 percent of the respondents believe annual investment returns will land in the 5 percent to 8 percent range – and more than 10 percent of respondents expected investment returns of more than 8 percent in the future.

The investment objectives of most endowments and foundations are linked to a benchmark, according to the survey, with absolute return-oriented goals the least prevalent answer.

Endowment and foundation investors embrace volatility – 56 percent were willing to lose 5 percent of their portfolio value or greater to accomplish a return objective, versus 44 percent who were only willing to lose up to 5 percent of their portfolio values. According to CAPTRUST, ”most respondents (based on their asset allocation) would have historically experienced losses far greater than the expressed willingness to experience loss.”

Most endowments and foundations – 80 percent of the survey respondents – indicate that their target time horizon is indefinite “or at least the foreseeable future,” according to the report, with another 15 percent using no defined time horizon.

In a few cases, CAPTRUST received responses from different people representing the same organization, noting that disparity between these responses “suggests that committee members/respondents were not entirely aligned as it pertains to return objectives, risk tolerance and many governance issues.”

The survey also indicated that foundations and endowments may need help with certain governance issues, like fiduciary training for board and committee members, defining the roles of committees, and drafting spending policies separate from their investment policy statement.

The survey was conducted in December 2018 among more than 150 respondents, 54 percent of which were private foundations and endowments, and 46 percent public non-profits.