Back in 1985, the investment portfolio of Yale University endowment was easy to understand with about 90 percent of the endowment’s assets in a combination of U.S. equities, foreign equities and bonds. In July 2016 (most endowments close out their fiscal year at the end of June), Yale endowments were a grand mix: U.S. equity, about 5 percent; bonds, 8 percent; foreign equity, 10 percent to 15 percent; and everything else in some version of private equity, natural resources, hedge funds and real estate.

That mélange of investments, heavy on real assets and alternatives, has been adopted by so many similar institutional investors it is often called the “endowment model.” Some money managers call it the gold standard of investing, but there are just as many critics of the model as there are supporters.

“The endowment model hasn’t been particularly good over the last several years,” says Will Braman, senior investment adviser and CIO of Ballentine Partners in Boston. “Yes, endowments have been diversifying, but they have also been de-worse-ifying.”

Braman was not just launching rockets. According to a study by The Chronicle of Philanthropy, the median return on investments for organizations (mostly foundations) whose fiscal year ended in December was 6 percent, while the larger group (mostly endowments) whose fiscal year ended in June was –2 percent. The returns needed by most nonprofits to keep their organizations running optimally are, again according to The Chronicle, 7 percent to 9 percent. That is because many endowments spin off as much as 8 percent annually for operations.

“Large endowments had one of their weakest years on record,” says Daniel Wildermuth, CEO of Kalos Financial. “In regard to Yale’s returns going back to 1996, the only years that were worse than 2016 were 2002 and 2009. This past year, Yale’s returns were 3.4 percent. In comparison, Harvard endowment returns fell –2 percent and Stanford endowment dropped –0.4 percent.”

But, all that was the past fiscal year; what should endowments expect for fiscal year 2017, which ended in June (although most reporting will not be until end of year). “We expect a better year,” says Wildermuth. “It would be hard for endowments to do worse than they did last year.”

Endowment Wealth Management out of Appleton, Wis., created The Endowment Index, which increased 3.8 percent for the quarter ended June 30. The S&P gained 3.09 percent for the same period. For the first half of 2017, the Endowment Index was up 8.94 percent compared to a gain of 9.34 percent for the S&P 500.

This is a contentious field and the Endowment Index has its own share of critics, particularly because it tracks so closely to the S&P 500, which, perhaps, indicates a bias toward equities. As Wildermuth expounds, “The index is all based on liquid securities and has almost nothing to do with endowments.”

As could be expected, Prateek Mehrotra, CIO of Endowment Wealth Management, takes umbrage of the criticism. There are 19 sub-asset categories to the Endowment Index, he says. “Our index puts you in the middle of the endowment universe, so we are not trying to outperform Yale or Harvard. We are trying to give exposure to the middle-of-the-road endowment return stream.”

To which, he points out, the large, $5 billion-plus endowments have about 10 percent of investments in equity, but the average allocation to equity is about 35 percent, which is reflected in the index, with another 12 percent in global fixed income and the balance in alternatives.

If the optimal return target for endowments is in that 7 percent to 9 percent range, this year should be a return to normality, says Mehrotra, who estimates endowment returns should average around 8 percent for 2017.

Although investors love to compare performance to an index, the truth is it is difficult to do so with the Endowment Model because, as put in place by the large endowments, there are many illiquid investments including real estate and real assets, which make it difficult to measure in the same way one can measure stock or bond performance. Secondly, the endowment model is based on the long-view, so an “off” year every now and then is not unexpected nor is it troublesome.

“The purpose of asset allocation is obtaining better risk-adjusted returns across a long time period, and a one-year view is not long term,” avers Robert Muller, CEO of Provasi Capital Partners. “It is fairly easy to suggest the primary reasons institutions tend to do better than individuals are because they maintain longer timeframes in their analysis of return streams and they tend to expand the universe of investable assets.”

In Muller’s view, it is not important if long/short investing under- or outperformed the S&P, but that the long/short investing delivered returns that are less correlated to the S&P.

The problem, of course, is to find all the right avenues of investments that over the long-term will give adequate results and will be non-correlative to the S&P. It’s not such an easy task as the investment options have a tendency to pop or deflate beyond expectations. Under the Endowment Model, institutions have lessened their exposure to the public equities market, but from June 2016 through June 2017, this investment option was up almost 20 percent.

Braman runs the numbers like a tout at the race track: “Year-to-date through August, if you were heavy into energy commodities and oil and gas, you are down 20 percent; if you were heavy into industrial metals such as palladium and copper, you are up 20 percent; agricultural commodities down 7 percent; broad commodities index down 5 percent; publicly listed, international real estate up 20 percent; publicly listed domestic real estate up 3 percent; global equities up about 15 percent; real assets in general down 10 percent; and hedge funds up.”

Under the endowment model, with asset allocation spread across so many different investment classes, some individual choices may fall but others rise. If endowments missed the public-equity boom of recent years — well, that won’t last forever. Stocks have up and down cycles just like other investments.

Some categories of interest in the endowment model do bear some further investigation.

The first is private equity. According to Wildermuth, Yale has more than one-third of its portfolio in private equity, which has been a phenomenal performer, up 30 percent a year over a period of 30 years. A study by Prequin Ltd. shows private equity firms delivered double-digit returns in 12 of the past 14 years and only lost money in one year, and by the end of 2016 private equity assets had more than doubled in the past decade to $1.75 trillion, reports The Wall Street Journal. Too much wealth, however, can cause too much problems; all those dollars and not enough investments to place it all.

Then there is the hedge fund issue. Hedge funds have also been popular under the endowment model. By some estimates the big endowments have about 10 percent of their investments in this asset class. The case for hedge funds was that they would lessen volatility and provide lower correlation to other asset classes. That should still be the case as this asset class should be what the name implies, a hedge. Unfortunately, some hedge funds, starting in the mid-aughts, had such stellar returns observers began to look instead at absolute performance, which in recent years has been fallow. There are a couple of reasons for this.

First, effectively, post-2008, central banks and government institutions around the world have gotten so involved in the economy that a large percentage of the investment thesis that hedge funds have been putting in place have not been allowed to unfold because, says Wildermuth, “It is not economics that are driving returns but more government.”

Secondly, the explosion of hedge fund popularity sowed the seeds of that industry’s troubles, with much of the large asset flows post-crisis going to the largest funds.

“This led to the mean reversion in returns when liquid assets and index returns were in a remarkable period of momentum,” says Michael Tiedemann, CEO of Tiedemann Wealth Management. “By definition, investing in hedge funds to manage risk was poorly timed and the selection of the largest was not additive.”

Tiedemann suggests it would not be surprising if disciplined, mid-sized hedge funds added a lot of value over the coming years if and when interest rates and P/E multiples begin to normalize.

Things are looking up for hedge funds. The liquid hedge fund strategy that the Endowment Index uses for its exposure is up about 4 percent so far this year. “In general, hedge funds have been the weakest link in the alternative bucket, but have done better year-to-date and outperformed core fixed-income,” says Mehrotra.

Thirdly, a lot of the large endowments have invested globally, and the fact that the U.S. dollar strengthened so dramatically over the past few years hurt returns. Emerging markets, for example, about a decade ago were 50 percent over-valued historically; by middle of last year, emerging markets were about 50 percent under-valued.

“Emerging markets had a terrible decade,” says Wildermuth, “but a lot of that was currency driven. I expect this year when endowments post numbers, they will do significantly better as currency declines for markets outside the United States have reversed.”

Finally, something should be said about illiquid assets, which at first glance have been outperformed by liquid assets such as public equities. Considering the endowment model is long term, that lagging performance may be illusory because illiquid assets will not show well on a performance report or statement until the assets are sold. Tiedemann, for one, likes the fact the endowment model includes illiquid assets. As he optimistically notes, “because many institutional pools have significant illiquid holding, I would expect that this will mute the true performance of the overall portfolio — but will carry into 2018 when public markets may no longer lead the portfolios.”

The Endowment Index was up more than 12 percent as of early September. Wildermuth, using numbers from the financial press, reports preliminary data showing colleges and university endowments so far this year have posted average gains of 12.7 percent. The first Ivy League school to report was Dartmouth College with a 14.6 percent gain, while Harvard delivered a more modest 8.1 percent return (the administration of the Harvard endowment has been unstable with numerous changes in leadership over the past half decade).

“Being globally diversified has started to pay off as previously lagging asset classes such as emerging market equity and debt have outperformed by a dramatic margin after five years of underperformance,” says Tiedemann.

One should not look too hard at the immediate performance of all the sub-categories of investments when it comes to the endowment model since, to reiterate, the model is built for long-term investment strategies. There will be excellent years and there will be poor years, which is OK as long as all other years are steady and meet the endowment’s strategic goals.

“Any suggestion that one asset class performs better is just a closet form of market timing and speculation,” says Muller. “Asset allocation is predicated on the notion that market timing and speculation is a fool’s errand. Institutions perform better not because they have found a silver bullet, but simply because they expanded the number of return streams they invest in and are committed for a long period of time to an expanded definition of diversification.”

Steve Bergsman is a freelance writer based in Mesa, Ariz.