Advisers should aspire to the endowment investment model
There are benefits for advisers that create more than just a balanced portfolio for clients
Financial advisers looking for ways to guide client portfolios through the kind of uncertainty that has descended upon the global financial markets need to look no further than a basic endowment model.
The benefits of diversity layered over a long-term investment approach that are trademarks of most endowment and foundation portfolios typically outperform shorter-term and more aggressive strategies.
But, so far this year, the endowment model, as illustrated by the Endowment Index, has become difficult to ignore.
For the quarter ending June 30, the Endowment Index, calculated by Nasdaq OMX, gained 15.4% on a total return basis. That compares to a 12.4% gain for a globally diversified portfolio of 60% stocks and 40% bonds.
The S&P 500 Index gained over 20% in the second quarter, but it would be difficult to imagine an investment portfolio 100% allocated to the S&P 500.
A key component to the endowment model is diversification, which showed 22 of the index’s 24 asset categories posting gains in the second quarter.
Top performers during the quarter were commodity oil and gas, and master limited partnerships, which gained 47.6% and 46.8%, respectively.
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In fact, 15 asset categories, ranging from real assets like timber to emerging markets, gained double digits during what was an unusually strong quarter.
The lone negative performers in the endowment index were Treasury bills with a 0.01% decline and managed futures, which lost 3.5%.
“The performance of the index highlights the benefits of diversification,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
“While U.S. equities bounced back in the second quarter and U.S. fixed income largely held steady, investors would have been aided by exposure to other investment styles,” he added. “The addition of multiple styles provides balance because winners in one quarter might not repeat the success in the next quarter.”
Vance Barse, founder of Your Dedicated Fiduciary, pointed out that diversification has never been easier with the advent and steady influx of customized exchange-traded fund strategies.
“Given the rise in popularity of ETF-based investing, it’s no surprise to see ETFs in this arena, but it’s important to understand what’s under the hood when it comes to alternative investments,” he said.
Even if most advisers are already allocating beyond basic 60-40 portfolios, the endowment model is difficult to achieve for smaller account balances, but it can still represent an aspiration.
“Endowments usually create very long-term asset allocation plans and generally stick to them,” said Paul Schatz, president of Heritage Capital.
“While 60-40 is a common benchmark, it is definitely flawed for endowments as so many of them have become much more granular in their process and use a whole host of private and more illiquid investments like private equity and venture capital,” he added.
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