Endowment Investments: Opportunity for Authentic Business Model Transfers

Last week, I was in Dubai to present at a conference on strategies for the investment of endowments (called awqaf in Arabic) in the Muslim world and beyond. The event, entitled the Dubai International Conference for Endowments Investment, was hosted by the emirate’s government.

Endowment investment is a prime example of an area with opportunity for transferring global business models and best practices into the Gulf – and the Islamic world more broadly. At the same time, it is an area in which authenticity and consistency with indigenous values are critically important.

Awqaf have a rich history, dating to the time of the Prophet Muhammad. Countless endowments have been established throughout centuries and around the Muslim world, for broad purposes as well as highly specific ones. Endowments have been used to fund public works such as wells and highways and to meet specific needs such as education and even wedding expenses.

Endowments in the region have traditionally taken the form real estate trusts. The properties are held in perpetuity and the proceeds are used for charitable purposes. In modern times, financial endowments – investing in financial securities in addition to real estate – have grown in popularity and are taking root more strongly than ever before. The migration from real estate to more balanced endowment portfolios was one of the key themes of last week’s conference.

My presentation was on the endowment sector in the US – both conventional and Shariah compliant – and key elements of the most sophisticated endowments’ business models. As a case study, I discussed salient elements of the Yale University Endowment model.

Four elements of Yale’s model stand out and hold particular relevance for international endowments:

1. The endowment practices robust strategy development, based on a rigorous analytical model developed by Nobel laureates affiliated with the University.
2. Yale invests in diverse asset classes, and has transformed its asset allocation dramatically in the past two decades. Private equity and “absolute return” (e.g. hedge fund) investments, for example, made up a larger part of the endowment than listed equities – domestic and international combined – by 2006.
3. The Yale endowment has developed strong internal capabilities, recruiting and retaining world-class investment professionals to oversee the portfolio. Its advisory Investment Committee, for example, includes senior leaders of top-notch investment and financial services firms such as Bain Capital and JP Morgan Chase.
4. The endowment is strongly marked by performance orientation – results are assessed using robust benchmarks and management is rewarded based on market practice.

While these four elements are broadly applicable to the awqaf sector, the flow of “best practices” is by no means one-way. Awqaf must be invested in a Shariah-compliant fashion, and Shariah compliance demands rigorous ethical analysis of where investment funds are deployed. As discussed in my February 2008 Harvard Business Review piece, Islamic finance is rooted in the powerful notion that people should not profit from activities they consider immoral.

Mohammed Amin astutely commented (see relevant post on this blog) that this notion, if practiced universally, “would transform the world.” US endowments can apply this principle and adopt an ethical review of their investment portfolios, asking the tough – but important – question of how closely their investments match their values.

The endowment sector, like many others, is an area where the transfer of global best practices can bring great benefit to institutions and the people they seek to serve. A “cut and paste” approach, however, will not work – a thoughtful assessment is essential to developing models that fit.

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