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A bicyclist walks by Langdell Hall, the Harvard Law Library, on the campus of the Harvard Law School in Cambridge, Mass., Monday, Aug. 1, 2005. Black-robed for two centuries, the Supreme Court justices could be sporting a new color next term: crimson. That would be to honor Harvard Law School, which if John Roberts is confirmed, could make an unprecedented boast: five of its graduates serving on the high court simultaneously. A sixth justice, Ruth Bader Ginsberg, attended Harvard Law but finished her degree at Columbia. (AP Photo/Charles Krupa) (CHARLES KRUPA/CHARLES KRUPA/AP)
A bicyclist walks by Langdell Hall, the Harvard Law Library, on the campus of the Harvard Law School in Cambridge, Mass., Monday, Aug. 1, 2005. Black-robed for two centuries, the Supreme Court justices could be sporting a new color next term: crimson. That would be to honor Harvard Law School, which if John Roberts is confirmed, could make an unprecedented boast: five of its graduates serving on the high court simultaneously. A sixth justice, Ruth Bader Ginsberg, attended Harvard Law but finished her degree at Columbia. (AP Photo/Charles Krupa) (CHARLES KRUPA/CHARLES KRUPA/AP)

Expert’s Podium

Invest like a 'super endowment' to avoid downturns Add to ...

I came across a compelling report the other day – a research paper on the portfolio performance of several large U.S.-university “Super Endowments.” These funds have soundly beaten traditional portfolios over the past decade, and they’ve done it with considerably less risk/volatility.

How? By taking a fundamentally different approach to asset allocation; specifically, their exposure to alternative assets. That is, hedge funds, private equity, managed futures, real estate (multi-unit residential, commercial, industrial), commodities, customized structural products, infrastructure, etc.

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How much outperformance are we talking about? Consider the following data:

 

Performance

(per cent)

percentage of alternative assets

U.S. Equity/bond portfolio (60/40)

4.6

0

Average U.S. endowment fund

5.6

53

Top 20 U.S. endowment funds

8

59

Top 5 U.S. “Super Endowment” funds

9.7

72

Yale/Harvard “Super Endowments”

9.6

69

Source: Frontier Investment Management. Data as at June 2011

What I find most interesting here is the performance advantage vs. the traditional “60/40” equity/fixed income portfolio. As I’ve said before, this is the “go-to” portfolio for many investors (including the pension fund industry), and I believe we’re coming into a time when it may well be obsolete. As the above data makes clear, a possible solution to this problem is to boost your allocation to alternative assets.

The topic of alternative assets has been an important topic within the high-net-worth population for the past several years. More and more HNW investors have become aware of the performance of these endowment funds – and more of them have looked to emulate these large endowment funds in their own portfolios.

From the discussions I’ve been involved with, this has less to do with performance enhancement than you might think (although make no mistake, that’s an important goal). Rather, it usually has a lot more to do with diversification and downside or “Value at Risk” (VAR) protection.

This attitude goes back to the 2008 market crisis; one of the most striking things about that crisis was that there weren’t a lot of places to hide. That is, most asset classes declined at the same time or had significantly increased correlation. One of the things these large endowment funds were able to do was to sidestep the crisis, because of their allocations. Sure, their portfolios declined. But they didn’t decline nearly dramatically as the broader market.

This has become a significant issue for HNW individuals, as well as the broader investment public. As the world becomes more economically interconnected, assets have become more correlated, and it has become more and more difficult to find assets that “zig” when everything else “zags.”

Looking closer at the allocation of the two Super Endowments, you can see how well diversified they really are – geographically, and by asset allocation.

Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada (www.tiger21.com/canada). He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)’. (www.stennerinvestmentpartners.com) (Thane.Stenner@RichardsonGMP.com). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.

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