Mercer | Endowments & Foundations Trilogy on Risk

Endowments and Foundations

A Trilogy on Return and Risk for Endowments and Foundations

E&Fs are exposed to many types of risk because of their high allocation to alternatives, their complex funding and spending structures, and diversity among their constituencies. We believe that we have an opportunity to redefine the concepts of return and risk in the E&F context, giving you more room to explore investment strategies that support your organization’s big-picture mission.

Mercer has produced a trilogy of white papers in which we attempt to redefine the concepts of return and risk in the context of endowments and foundations.

  • A New Approach to an Old Concept — Improving investment policy by refining risk management
  • Integrating Expectations — Moral hazard and the plight of the investment committee
  • The Lessons and Limits of Diversification. The final paper tackles the recent history, role, and expectations of diversification, including the value of rebalancing.

The first installment in the series focuses on refining definitions of risk, so that portfolios reflect better alignment with the risk tolerance of the investment committee. The second article delves into the hazards of ad hoc changes to policy when there is a mismatch between risk definitions and investor expectations. The final paper tackles the recent history, role, and expectations of diversification, including the value of rebalancing. Faith in the power of diversification has been severely tested since the global financial crisis, prompting the question: Is diversification still worthwhile?

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