Investment Methodology

For many years, the Ivy League university endowments at Harvard and Yale have outperformed the indexes by using the “endowment model,” which involves broad diversification across asset classes, equity styles, foreign markets and investment philosophies (1). It’s our opinion that this shows how allocating a portion of assets to categories other than the traditional buy and hold of stocks, bonds, and cash can be a significant lever in increasing risk-adjusted returns, although diversification neither assures a profit nor guarantees against loss in a declining market. To help you invest more similarly to the endowments we typically allocate to the equity of firms in precious metals, farm commodities, timber, oil and gas, and other natural resource-intensive industries, but there are many other investment opportunities that can be used to help build a robust portfolio (2).

Until recently, diversification across many dimensions was unattainable or unattractive for most investors because of the lower liquidity, lower transparency, higher fees, and larger account minimums (often times well over a million dollars) typically associated with institutional style money management.

For the 10 years through 2013 the largest university endowments have averaged a 10% annual return (3). Both these track records and a vast body of research indicate that broad diversification, essentially investing more similarly to the big endowments, can improve the returns earned by individual investors. Our mission is to break down the barriers that commonly prevented individual investors (4–7) from diversifying more like the big endowments.

 

  1. Singh, M. (n.d.). How to invest like an endowment. Retrieved from Investopedia: http://www.investopedia.com/articles/financial-theory/09/ivy-league-endowments-money-management.asp.
  2. There can be specific risks associated with an investment in each of these specific asset categories. International investments involve special risks, including political and economic uncertainty, currency fluctuations, and different accounting practices. Please talk with your financial professional to discuss if these asset categories might be appropriate for your risk tolerance and goals.
  3. Gollan, J., Perez, E., & Williams, L. (2014, February 20). UC endowment has worst investment returns among largest U.S. college funds. Retrieved from http://cironline.org/reports/uc-endowment-has-worst-investment-returns-among-largest-us-college-funds-5929.
  4. Goetzmann, W. N., & Kumar, A. (2008). Equity portfolio diversification. Review of Finance, 12, 433–463.
  5. Gallo, J. G., Phengpis, C., & Swanson, P. E. (2008). Institutional flows and equity style diversification. Applied Financial Economics, 18, 1441–1450.
  6. French, K. R., & Poterba, J. M. (1991). Investor diversification and international equity Markets. American Economic Review, 81, 222–226.
  7. Jeske, K. (2001). Equity home bias: Can information cost explain the puzzle? Economic Review, 2001(3), 31–42. Available at https://www.frbatlanta.org/filelegacydocs/ACF62A.pdf