The so-called endowment model of investing, with its heavy dose of alternative investments, came in for some rough times after the financial crisis, when many college endowments were forced to unload illiquid stakes in alternatives.
Some well-known investors, such as the Yale University endowment fund, which popularized the endowment model, had claimed impressive returns up until the crisis. They argued that the perpetual nature of the funds allowed for a longer time horizon and large allocations to alternatives.
But the crisis raised the question of whether the endowment model is suitable for individual investors.
Todd Ganos still thinks so.
“Some people like [the model], some don't. But it is how we diversify,” said Mr. Ganos, principal of Integrated Wealth Counsel LLC, which manages about $225 million.
OFFBEAT MIX
Mr. Ganos allocates as much as 45% of a portfolio to alternatives.
Included in his somewhat offbeat mix of investments are certain types of real estate investment trusts, royalty trusts, and some private-equity and absolute-return funds.
Mr. Ganos isn't looking for higher returns as much as a way to increase diversification and reduce risk.
“I will say, though, as we have employed it, we have enjoyed good returns,” he said.
His allocations to royalty trusts and REITs, in particular, also generate income for clients while creating exposure to real assets.
Sure, resource-related investments have had some short-term setbacks, but Mr. Ganos said his model works over the long run.
And individuals have longer time frames than many think. Advisers should “look at families intergenerationally — that's the key,” Mr. Ganos said.
He uses several royalty trusts to get direct exposure to energy and iron ore. The trusts are non-operating entities set up to collect royalties from mineral leases run by third parties, similar to direct-participation programs — but with liquidity.
And “they pay handsome dividends,” Mr. Ganos said.
He sees royalty trusts as plays on real estate, like REITs.
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The difference with royalty trusts “is that the value is under the ground versus on top of the ground,” Mr. Ganos said.
He likes the BP Prudhoe Bay Royalty Trust (BPT), which has assets in Alaska's Prudhoe Bay oil field; the Permian Basin Royalty Trust (PBT), which has mineral interests in the Waddell Ranch of Crane (Texas) County; and the Mesabi Trust (MSB), which has iron ore interests in Minnesota.
Royalty trusts are often seen as income-producing asset plays rather than as growth investments.
But with equity markets making little headway, the trusts have produced superior total returns, Mr. Ganos said.
“If you were to look at the oil-based trusts over a 10- to 15-year period, they tend to have outperformed the big oil companies,” Mr. Ganos said.
"BORING' DIVIDENDS
True, the past decade has been good for any big-dividend payer, and the future may hold something else, Mr. Ganos acknowledged. But “for us, we're happy with a nice, boring dividend,” he said. “Boring is good.”
The same holds for REITs, which have done well over the past decade (about a 10% yearly total return, Mr. Ganos estimates). Reverting to historical norms, the asset class should yield 6% to 9%.
Again, he'd be happy with that.
Mr. Ganos warns that some real estate sectors will do better than others. He particularly likes health care REITs, which include senior- living facilities that will benefit from the aging of the population.
[email protected]: @dvjamieson
