Endowments and foundations turn to alternatives as confidence in return targets fades

Endowments and foundations are carrying more uncertainty into their investment programs than at any point in recent years, with geopolitical pressure, rising spending demands and increasingly illiquid portfolios combining to test nonprofit investment strategies.

Morgan Stanley's 2026 Endowments and Foundations Survey, which polled investment decision-makers at 100 mid- to mega-sized organizations in January 2026, found that just 13% of respondents describe themselves as very confident they will hit their three-year return targets, down from 19% in 2023.

Geopolitical uncertainty ranked among the top financial concerns keeping investment leaders up at night, alongside market volatility, inflation and liquidity demands.

Alts take the lead

Alternatives have now surpassed public US equity as the single largest allocation in endowment and foundation portfolios, representing 36% of assets under management compared to 27% for domestic stocks.

But the build-out phase appears largely complete. Fewer organizations plan to increase alternatives exposure over the next 12 months, and the proportion planning to reduce allocations has more than doubled since 2023.

"The survey results indicate that endowments and foundations are entering a new phase of portfolio management, where liquidity, spending discipline and governance are just as important as long-term returns," said Jeremy France, head of Institutional Consulting Solutions at Morgan Stanley. "As alternative allocations mature, in our view, the priority is shifting from portfolio construction to resilience - helping institutions meet their obligations while navigating continued uncertainty."

That shift is evident in how organizations now describe their biggest challenge with alternatives.

Nearly half of respondents, 47%, identified liquidity as the single greatest concern, up sharply from 21% in 2023. Getting into private markets, once the dominant preoccupation, has given way to managing the ongoing demands of capital locked up in illiquid vehicles.

Governance gaps

Despite the growing focus on liquidity, formal governance frameworks have not kept pace.

About two in five endowments and foundations report that their investment policy statement does not explicitly address liquidity parameters such as minimum liquid holdings or lockup limits. More than two-thirds monitor liquidity at least monthly, yet that discipline has not consistently translated into written policy.

On the spending side, nearly a third of organizations anticipate their spending rate will rise over the next three years, more than double the 15% who said the same in 2023.

For institutions whose portfolios primarily fund operations rather than grant making, that pressure is particularly difficult to manage. The parallel for retail clients is clear: withdrawal sequencing and cash flow planning matter as much as return generation when a portfolio is actively being drawn down.

Fundraising expectations were optimistic at the time of the survey, with 38% of respondents expecting 2026 donations to exceed 2025 levels. However, Morgan Stanley noted that first-quarter market volatility driven by geopolitical conflict and reduced Federal Reserve rate-cut expectations has likely tempered that outlook since responses were collected in January.

Consultant relationships have deepened alongside portfolio complexity, with more than three-quarters of respondents reporting they have worked with their current external consultant for six or more years, up from 49% in 2023. The average length of those relationships now stands at 9.4 years.