Asset Allocation and Risk Management
The asset allocation policy for Caltech's endowment investment pool emphasizes diversification across asset classes, investment styles, and geographic locations as the Institute strives to achieve strong long-term investment performance while avoiding highly concentrated risks.
Portfolio risk management focuses on market correlations and sensitivity (beta), interest-rate risk, expected volatility, and liquidity. In addition, the portfolio is subjected to analysis that models how it is expected to act in situations comparable to the 2007–2008 financial crisis, the 2001 tech wreck, the September 11 tragedy, and other scenarios (which now include the COVID-19 pandemic). The portfolio responses to these scenarios are monitored over time, and adjustments may be made if the projected portfolio drawdown is larger than anticipated.
Strategic asset allocation ranges are established by Caltech's Investment Committee and are reviewed periodically. In addition, the Investment Committee and the Investment Office make tactical adjustments in response to current or anticipated shorter-term market conditions.
At the end of fiscal year 2021, the endowment investment portfolio was tactically underweight in traditional investment-grade fixed income and real assets, and was overweight in private equity relative to our strategic allocation guidelines. The underweight position in fixed income (which has been the case for nearly 10 years) continued due to low interest rates and the expectation that rates at some point will revert to more "normal" levels; the real assets' underweight position reflects continued weakness from low commodities prices.
Caltech's endowment investment pool is closely managed and monitored for liquidity. We define liquidity as the ability to realize and access cash from an investment in a timely manner. Liquidity is desirable for five primary reasons:
- The portfolio has financial obligations, such as investment fund capital calls, which often must be satisfied with relatively short notice.
- The ability to implement changes in tactical and/or policy allocations requires liquidity.
- From time to time, unusual investment opportunities arise—driven by market or other forces—that cannot be seized without liquidity.
- In periods of economic downturn, the endowment investment portfolio must be prepared for a potential reduction in cash inflows while maintaining its payout to the Institute, which is essential to achieving Caltech's mission.
- Unrestricted endowment investment pool funds may need to be tapped to help maintain operating continuity in cases of emergency or financial disruption.
The Caltech endowment investment pool is quite liquid, with more than 21 percent of the assets currently convertible to cash within one to two weeks and 26 percent convertible to cash within a calendar quarter under normal circumstances. The Institute's additional sources of liquidity include substantial funds that have been raised from issuing bonds over the last six years as well as committed lines of credit provided by commercial banks.