BNY Mellon building in New York. (Photo: AP) BNY Mellon building in New York. (Photo: AP)

Some alternative investing strategies have performed better than others since the pandemic struck. A new study by BNY Mellon found that smaller endowments and foundations — which tend to use different strategies than larger ones — performed better pre-pandemic during 2019, while bigger ones are the top performers since the pandemic began.

Using its Asset Strategy View, which leverages aggregated data to generate information about institutional investor allocation behavior, BNY Mellon examined 93 endowments and foundations (E&Fs), which returned -10.46% on average in the first quarter, the bank found.

However, smaller E&Fs (under $1 billion) underperformed larger ones, falling 11.39% and 9.46% respectively. The study credits the difference to smaller funds making larger allocations to equity and fixed income while larger E&Fs had significantly more exposure to alternative asset classes such as private equity and hedge funds.

“As we are still in the relatively early stages of the pandemic, it is difficult to assess the longer-term financial impacts on endowed institutions,” according to Frances Barney, head of Global Risk Solutions, BNY Mellon Asset Servicing. “Though they embrace a long term view to manage their finances and investments despite market fluctuations, the longer the crisis continues, the harder it will be for some institutions to support their spending needs and maintain the discipline they aspire to.”

Prior to the pandemic, in 2019, BNY Mellon found smaller E&Fs outperforming larger funds by 19 basis points, returning 15.11% vs. 14.92% for larger endowments and foundations.

The 2020 reversal of fortunes was largely due to asset allocation choices.

Smaller E&Fs increased real estate holdings 28% over the five-plus year period ending in Q1 2020, while decreasing holdings by 24% in private equity. The Dow Jones U.S. Real Estate Index ended down more than 24% in Q1, while the S&P Listed Private Equity Index was down only 3% in Q1 2020.

In contrast, larger E&Fs increased exposure to high-performing private equity by 33% and hedge funds by 2% in sub asset classes over the last five years, while exposure to real estate remained consistent and other real assets decreased 4%.

The study does note that over three- and five-year periods, larger E&Fs did outperform their smaller counterparts.

“Larger E&Fs appear to have cushioned their portfolios from the dramatic market drops seen in the first quarter of 2020 by having greater exposure to higher-returning alternative asset classes,” it says. “However, it is possible that lagged performance might be obscuring more dramatic dips to come in some alternative asset classes.”

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