Many Ivy League universities, as Yale and Harvard, invest their endowments using a strategy that generates consistent long-term income and protects their principal against inflation and market risk through diversification and asset allocation. Dubbed as the “Endowment Model,” this investment strategy has proven effective in creating consistent long-term returns while mitigating risk during geopolitical tensions, market crises, economic downturns, COVID-19, etc.
The Endowment Model was adopted by David Swensen when he was Chief Investment Officer at Yale University. The model relies on building a diversified portfolio of investments with low correlation to minimize risk and optimize returns, and an asset allocation that favors asset classes with high expected returns and avoids those with low expected returns regardless of liquidity. This tends to favor private investments due to their illiquidity premium against fixed income and commodities. Investments may still include publicly traded stocks and bonds, but the lion’s share would be in private market assets, such as hedge funds and private equity.
To reduce correlation and protect against market volatility, diversification under the Endowment Model would frequently extend across geographies, sectors and asset classes, thus curbing losses should one market underperform or plummet.
The Endowment Index (ENDOW) created by Nasdaq OMX at the end of H1 2018 has outperformed the traditional tactical asset allocation model and a 60/40 Global balanced model in the long-run, driven by five concepts:
Long-term orientation: Focus on their long-term objectives and ride market downturns instead of selling when markets fluctuate.
Focus on high-return assets: Liquidity often comes at a high price in the form of lower returns. To preserve the invested principal against inflation and secure better long-term returns amid low government bond yields, invest in higher-return, long-term illiquid assets.
Diversification: Combine assets that respond differently to market forces.
Pursue illiquid opportunities: Alternative assets tend to be less efficiently priced than traditional securities, thus offering an opportunity to exploit market inefficiencies.
Manager selection: Performance varies widely between alternative investment managers. Selecting asset managers with proven track-records and the right connections adds value to portfolios.
As a leading wealth manager in the Gulf region, we use our global network of partners and decades of experience to build diversified portfolios in private market opportunities. By applying the Endowment Model, we advise our clients to reduce risk through diversification by geography, sector and asset classes. We also favor a long-time approach and compounding returns for optimal returns.
Deeply-rooted in the region, we understand the goals and objectives of Gulf investors. Contact our financial advisors to help you build a robust portfolio to preserve your family wealth for generations to come.
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