Research Spotlight

NSE-ISB Trading Laboratory organises talk on Endowment and Investment

The NSE-ISB Trading Laboratory organised a guest speaker session on July 21, 2014 at the ISB’s Hyderabad campus. The speaker, Srinivas Pulavarti, President and Chief Investment Officer, UCLA Endowment and Investment Company presented on the topic “Endowment and Investment”.
 
The veteran endowment and investment management executive, shared about his rich experience in the investments sphere with the ISB community. He discussed about the Assets-Liability Model and how its functions differently for pension funds, insurance and endowments. Participants also learnt about the various risks associated with the different investment objectives for these respective funds.
 
During the session, Pulavarti spoke about how endowment is characterised by the lowest exposure to loss or devaluation due to the minimal liability of paying back. The different approaches to investments in an endowment fund include the creation of intergenerational equity of money and equity of money for the current generation. The former deals with investing and serving for a very long term, leading to greater investing freedom. In the latter approach, investment freedom is relatively limited though decision making is more flexible due to the smaller size of the fund.
 
Unlike other investments, the best managed endowment funds earn around 10 percent annually, which is a very attractive rate of return in developed markets. The interesting aspect of an endowment is that while there is a steady inflow of funds through the year, the outflow of funds is limited. 
 
Pulavarti succinctly framed the main questions to any investment decision: Where to invest? How long to invest? How much to invest? Pulavarti was of the opinion that the best strategy would be to restrict the outflows to be equal with or lesser than inflows and focus on long term (approaching infinity) investments. Unlike other assets having a fixed duration, a unique feature of equity is that it is a long duration asset. Therefore an endowment investment suggests a 100 % investment in an equity based portfolio.
 
Apart from the requirement for careful identification of such assets, he also suggested that an investor must be disciplined and strategise according to the investment climate and objectives of the endowment. For example, one of the investment strategies is to invest in industries with significant cash flows such as consumer durables, ITES, etc. He also pointed out that an investor should adopt a passive investing strategy in the developed and efficient markets while actively investing in developing and semi or inefficient markets.

The session ended with a question and answer session where Pulavarti responded to various queries related to endowment strategies, the difference in markets and the current state of the Indian stock market.