For those with wealth over ten million, the Endowment Style Portfolio is being used as a model to protect wealth, as well as to give it a better grwoth trajectory than the traditional 60/40 portfolio structure. Here is a great summary of ESP and how their performance is influencing wealth management by John Authors, FT:
The endowments
of the most prestigious US universities have long been watched as a model by asset allocators, and
have helped to drive interest in such sectors as private equity, hedge funds, and natural resources.
Their financial year ends in June, and their results are now available, summarised in this excellent
blog post by Markov Processes International.
The most interesting result, by far, is what has happened over the past 10 years — a period that
started almost exactly as the credit crisis was beginning to take hold in July 2007. By lucky
coincidence, I wrote this Long View column in June 2007 after listening to David Swensen, head of
Yale’s endowment speak at a Yale reunion. At that point, Yale’s record looked stunningly good.
How has it done since? This is Markov’s summary of how the eight Ivy League universities
performed, compared with a “60/40” portfolio (60 per cent US stocks, 40 per cent US bonds)
representing a typical asset allocation for such endowments before the move into alternative assets
took hold:
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| Jacoline Loewen |
Only Princeton and Columbia have managed to beat a 60/40 portfolio over that time, even though
it started just before one of the worst crashes for public equities in history. Yale has almost
matched it — but it went to far more trouble than it would have taken just to put the endowment’s
money into conventional public assets. Others, particularly Harvard and Cornell, have lagged
behind badly.
Over the past year (not such a relevant period for a long-term endowment, but the results are still
interesting), all the Ivies managed positive results, and all bar Harvard managed to beat the 60/40
portfolio reasonably easily, led by Dartmouth.
What are the lessons on asset allocation?
Execution evidently matters. This is not just a game of asset
allocation. If you look at how Harvard and Princeton were positioned 10 years ago, they are
strikingly similar; with much the same weight in hedge funds and minimal interest in bonds and
cash. Harvard had a much greater weighting of resources, which appears to have hurt its returns,
and Princeton was considerably more enthusiastic about private equity and venture capital. But
these asset allocations are similar enough, while other asset allocations among the Ivies are very
different and yet ended with returns in the middle of the pack, to suggest that implementation had
a lot to do with this.
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| Book by Jacoline Loewen |
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