The dual goals of our mission – providing support for current university operations and preserving the endowment’s purchasing power for future generations – require an investment program that is equity-oriented and capable of generating sufficiently high long-term returns, notwithstanding occasionally volatile global economic environments.

The Merged Pool includes domestic and foreign public equities, real assets (real estate and natural resources), and private equity investments. Absolute return strategies that have a low correlation to broader markets contribute to portfolio diversification. Acknowledging the University’s long-term investment horizon, the investment strategy is designed to accept a responsible degree of illiquidity to drive incremental returns. A small portion of the Merged Pool is held in high quality fixed income and cash for liquidity purposes. Read more about SMC’s asset classes.

Based on mean-variance modeling, the current asset allocation is expected to generate an 8.3% real arithmetic annual return (after the impact of higher education inflation and all costs and fees) with annualized volatility of 15.0%, which translates to an expected compound real return of 7.1%. We believe these are reasonable risk-return assumptions when considering sufficiently long periods of time, but naturally expect material deviations over shorter time frames. We employ additional scenario analysis to forecast potential returns, volatility, and liquidity in stressful times not well captured by the normal distribution that underlies mean-variance analysis.

To maintain desired risk-return characteristics as market conditions change, SMC exercises discipline in managing asset class exposures and frequently rebalances the portfolio back to its policy targets. While policy targets are revisited only once per year, changes to exposures within asset classes occur more frequently as market opportunities develop. In this manner, we hope to take advantage of an ever-evolving bottom-up opportunity set while preserving overall discipline.

In June 2020, the University Trustees committed the University to achieving at least a net-zero carbon profile by 2050, including the investment portfolio. This goal, which will require advances in disclosure and measurement of carbon by businesses around the world, will be approached in a fashion that concords with our Ethical Investment Framework. The Ethical Investment Framework was formally adopted by the Trustees in 2018.