What is an endowment?

Note: This article is a compilation of our original mini-series on endowments, originally published on LinkedIn at this link. It is therefore written in a concise, somewhat more informal style suited to social media. The mini-series was published in June 2024, and the observations and figures below reflect that period.

Why should I, as a wealthy individual, care about wealth management based on the Endowment Model?

What does the word “endowment” actually mean in investment terms? Or, more precisely, what does it mean to manage wealth in the style of university endowments? What kind of annual return should such a portfolio generate? And why should wealthy individuals and families in the Czech Republic care?

Family Office Partners has followed the principles of the Endowment Model since 2018. In the sections below, we explain the basics of this increasingly popular concept, including its advantages and disadvantages, who it is suitable for, and who it is not suitable for at all.

To begin with:

An endowment is a pool of assets that has been set aside, transferred, invested, donated, or otherwise dedicated to serving a specific purpose. It typically has an effectively infinite investment horizon. Its role is to generate funding over time, preserve its real value against inflation, and ideally continue to grow. It should also be systematically protected against risks such as excessive volatility, concentration, impulsive decisions, high costs, power struggles, and similar threats. Most importantly, it should function as one cohesive whole rather than as a fragmented collection of assets.

This investment model is commonly used not only by universities abroad, but also by wealthy families and individuals.

Historically, the Czech market has lagged somewhat behind in sophisticated wealth management. But even here, the proven endowment concept is beginning to gain the attention it deserves.

The next question is what kind of performance can realistically be expected from this style of wealth management.

Wait, the Endowment Model only earns a few percent above inflation?!

Yes, that is correct.

‍Endowments typically outperform inflation by only a few percentage points over the long term. Leading university endowments such as Princeton, Stanford, Oxford, or Cambridge have historically generated annual returns in the range of approximately 9–11%.

But the key phrase is over the long term.

Average endowments tend to generate around 7–8% annually. Again, it is important to understand that these are long-term statistics. An endowment is not a fashionable strategy for a few years. Protecting and growing wealth has to be designed for decades.

So if someone argues that their Czech apartments made 15% a year, Nvidia 50%, or Bitcoin even more, they are comparing apples and oranges.

Few people mention the old stocks still sitting in their portfolio from more than a decade ago, mediocre funds barely above zero, direct investments in companies that have already failed, or loans that may never be recovered.

An endowment portfolio cannot simply highlight its winners and quietly exclude everything else from the annual numbers.

When we hold up a truly objective mirror to our wealth, many of us may discover that earning a few percentage points above inflation is actually not unattractive at all. Especially when the Endowment Model represents a tangible, sustainable, long-term framework that can also be passed on to the next generation.

The endowment model is only for universities and multibillionaires…

Not exactly.

It is true that endowment-style wealth management generally starts making more sense once investment assets reach a substantial scale. But you do not need to be a multibillionaire or a major institution.

Nor does the legal structure necessarily need to be complicated.

An endowment does not have to exist as a fund or foundation. At its core, it is primarily a concept and a way of managing wealth.

Many people hold investment assets directly in their own names while applying endowment principles to the way those assets are structured and managed.

In other words, the Endowment Model can be applied perfectly well to the wealth of a high-net-worth individual or family. This is common abroad and increasingly relevant in the Czech Republic as well.

The concept itself, and the discipline to follow a long-term plan, matter far more than the legal wrapper. It is about viewing investment wealth as one interconnected whole rather than as a collection of separate categories. It means avoiding fragmentation across managers who do not communicate with one another, consolidating investment information in one place, and creating an objective view of the entire portfolio. It is also about overarching responsibility, including the related legal and tax implications, and about genuine diversification, alternative asset classes, and a very long investment horizon.

We will look at these characteristics in more detail below.

Endowment investing is long-term, diversified, and alternative

As mentioned above, the Endowment Model is commonly used to fund the operations of universities, particularly in the US, but its characteristics also make it popular among single- and multi-family offices.

So what distinguishes an endowment-style portfolio from more traditional, often ad hoc, or even FOMO-driven investing in individual stocks, bonds, and the occasional fund?

• First, genuine global, currency, and thematic diversification. How many investors are still heavily exposed to their domestic currency or the Czech region? And no, owning US stocks alone does not constitute complete diversification.
• Second, a meaningful allocation to alternative assets such as private equity, venture capital, commodities, market-neutral hedge funds, art, collectibles, and other strategies designed to provide low-correlated sources of return over many years. This does not mean the portfolio needs dozens upon dozens of instruments. Less can be more. Quality matters more than quantity.
• Third, a long, or even effectively infinite, investment horizon allows capital to be allocated to less liquid and more ambitious opportunities that may generate attractive returns over time. Giving investments enough time to develop also reduces the pressure to make rushed or emotionally driven decisions.

Endowment investing: a necessity for some, a Plan B for others

Why operate an endowment at all?

For universities, churches, or foundations, the answer is relatively simple. They have a finite pool of assets from which they need to fund operations every year.

Not occasionally. Not only when markets are strong.

Their investment model therefore cannot tolerate excessive volatility or structural risks. By design, it has to be relatively conservative.

For wealthy individuals and families, the situation may be slightly different.

For those who have already moved on from the original source of their wealth, whether through the sale of a business, the end of a sports career, inheritance, or something similar, an endowment strategy can represent the next stage in the life of that wealth.

Perhaps it will not grow as aggressively. But it may provide something else: more time and less stress.

For those who are still actively building businesses, regularly setting aside part of their wealth and managing it in an endowment style can serve as a Plan B. Almost everyone knows someone whose business stopped working, or whose family was suddenly confronted by serious illness, an accident, or another unexpected event. In such moments, having a functioning independent source of family funding can become invaluable.

Either way, an endowment is designed to serve for the long term, effectively across generations, with an emphasis on lower volatility and the ability to provide ongoing funding.

Why use the Endowment Model when you can simply buy the S&P 500?

A fair, and intentionally provocative, question.

Buying the S&P 500 and largely forgetting about it is a perfectly legitimate alternative. Historically, the index has generated attractive long-term returns. It is also cheaper and considerably simpler to implement.

So why do leading universities employ sophisticated investment teams and make things so much more complicated?

First, despite the popular belief that the S&P 500 “always” goes up, that is not true over every relevant time period.

There have been long stretches when US equities produced little or no return. There have also been periods of prolonged decline.  

The same can be said of almost any asset class.

Japanese equities. Real estate. Commodities. Technology stocks.

Concentrating a portfolio in one or two asset classes will almost inevitably expose an investor to lean years, and sometimes lean decades.

For institutions such as universities or foundations, this is an unacceptable risk. They need to continue functioning regardless of market conditions. They need operating cash flow.

The same applies to many families and individuals. They may not be able to wait ten years for a particular asset class to “wake up” and start generating returns again.

A properly structured endowment should therefore provide both liquidity and cash flow even during weaker periods. Its total value should also fluctuate less dramatically than a portfolio concentrated in one or two asset classes.

A more conservative endowment may never deliver spectacular 30% years. But it should also reduce the risk of periods when the only way to obtain liquidity is to sell assets at a loss. Some parts of the portfolio should always provide stability and essential cash flow.

In other words, an endowment is designed to offer a more stable journey. Individual investments can be a much wilder ride.

I know a fund XYZ that makes 14% a year...

Almost everyone knows a fund or investment with attractive returns.

Apparently year after year.

But does it really work that way? Has it generated those returns for decades? And will it continue to do so?

Endowment portfolios naturally try to identify and hold high-quality investments across the various asset classes they allocate to, including those capable of generating meaningful excess returns over long periods.

But history repeatedly shows that, with very few exceptions, nothing works forever.

An endowment therefore combines investments with relatively low correlation to one another. If one investment underperforms or, in the worst case, fails completely, the portfolio as a whole should remain relatively resilient.

An endowment portfolio cannot be compared with a single fund or investment, nor is it trying to compete with one. Individual investments collectively create the endowment portfolio and are expected to work together as a team. So yes, there may well be a “fund XYZ earning 14% a year” somewhere in the portfolio. But that does not mean the portfolio as a whole should be expected to return 14%.

The other side of the equation is equally important.

When fund XYZ has a bad year, the return of the entire portfolio should not fall by the same amount. Overall performance reflects the weighted result of all underlying investments.

Which brings us to the next question: what should the ideal allocation between individual asset classes actually look like?

Spoiler: there is no perfect formula.

The magic allocation between asset classes in an endowment

There is, of course, no universal ideal allocation across the asset classes that make up an endowment portfolio.

Generally speaking, more capital is allocated to relatively conservative strategies and less to higher-risk ones.

At the most basic level, portfolios are often divided between traditional and alternative assets.

Traditional assets typically include equities, bonds, and cash. Alternatives may include private equity, venture capital, real assets, absolute-return strategies, hedge funds, and others.

The exact categories and methodology differ from one endowment to another. So do the percentage allocations, which also evolve over time.

What these portfolios generally have in common is that no single asset class should become overwhelmingly dominant.

An excessive concentration in, say, equities from one country, real estate, or venture capital would create a level of portfolio risk that defeats the purpose of the model.

The Endowment Model does not try to continuously predict which one or two “hot” asset classes will outperform over the next six months or two years and then invest with maximum conviction.

A portfolio manager may reasonably increase or decrease allocations in response to long-term macroeconomic trends. But the portfolio should not become dependent on a single bet.

The more important objective is to create a balanced portfolio capable of delivering attractive long-term returns with the lowest reasonable level of risk.

We discuss this in more detail on the Family Office Partners website in this article.

There is therefore no magic allocation, but the following examples show how several leading institutional investment teams have approached the challenge:

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We want endowment portfolios to be mobile

At Family Office Partners, we want endowment portfolios to be mobile in three ways: geographically, generationally, and informationally.

Geographical mobility is relatively straightforward.

We want the family portfolio to continue serving us even if we are on the other side of the world. For most investments, it should not be legally, physically, or operationally dependent on one specific country, which in our case would typically be the Czech Republic.

You never know what may happen, so we want a Plan B here as well.

Generational mobility means something different.

The next generation should inherit a comprehensive and functioning investment system built on modern investment principles. The portfolio should not depend on the knowledge of a single person who may one day leave behind a structure that nobody else understands.

Informational mobility follows naturally from this.

We want the endowment system to be transparent and understandable. Put simply, it should be sophisticatedly simple so that another competent person can take over and continue managing it if necessary.

These principles sound simple.

Implementing them consistently is considerably harder.

Recap, part one: why we chose the Endowment Model

Let us start with why we, the founding partners of Family Office Partners, Petr Vaclavinek and Oldrich Myslivec chose the Endowment Model for our own multi-family office.

In short, we wanted something proven, diversified, long-term, and uncomplicated.

We believe the same reasons will resonate with many others. The model appealed to us back in 2018, and we have remained committed to it ever since.

First, we wanted to avoid the endless guessing game of what will perform best over the next six months, where the highest returns will come from, or what happens to be “hot” right now. We have spent more than two decades in investing and know very well that consistently identifying the best-performing asset classes year after year is a Sisyphean task. It is also stressful. Life is short.

Second, we did not want simplistic portfolios consisting only of stocks, bonds, obscure funds, and Czech real estate.

We wanted something genuinely global and mobile, both geographically and across generations.

Third, we did not want dozens of individual investments, whether stocks or anything else.

We prefer fewer, higher-quality investments. We wanted a portfolio that was clear, not an overcomplicated mess.

Finally, reinventing the wheel from scratch in the Czech Republic seemed unnecessary. Surely there were proven models elsewhere. We simply did not want to copy something complicated or mysterious. The objective was to make our investment lives easier, not harder.

Investing in the style of leading Western university endowments matched those criteria closely.

And we are no longer alone.

Our multi-family office has gradually grown to include other families and partners, reinforcing our belief that the Endowment Model is a suitable framework for the families we work with.

It is certainly not the only possible approach, and it will not suit everyone.

But it gives our families a sustainable portfolio framework based on principles already used by major institutions and family offices throughout the developed investment world.

We believe we are in good company.

Recap, part two: endowments manage hundreds of billions worldwide

Thousands of institutions and families around the world use endowment-style investment models.

They have chosen this approach over alternatives such as traditional 60/40 portfolios, pure index investing, factor-based strategies, and others.

Many endowments are managed by highly experienced investment teams whose careers have been dedicated to this approach.

Large endowments can manage several billion, or even tens of billions, of dollars, pounds, or euros.

These are not obscure portfolios built around ad hoc methodologies developed by a handful of enthusiasts.

At the same time, the principles can also be applied to substantially smaller portfolios once the wealth reaches a scale where broader diversification and professional management become worthwhile.

Many single- and multi-family offices have adopted the Endowment Model precisely because it addresses two fundamental requirements of family wealth: serving both current and future generations through ongoing cash flow, while preserving the real value of the assets against inflation and other risks.

Because this model has worked successfully in more mature investment markets, it made sense for us at Family Office Partners to adopt the same principles and gradually make their benefits available to other families as well.

Our commitment to the model is also reflected in the continuous development of our proprietary online platform, eFOP, which consolidates investment instruments across asset classes together with their key parameters and supporting documentation.

In our interpretation, an endowment is therefore a long-term and sustainable framework for managing total family wealth as one integrated whole.

It is a system designed to serve us today and, one day, to be passed on to the next generation.