New platforms can provide a wider range of investors with access to alternative investments without exposing them to higher risks.
The markets have experienced considerable volatility since the beginning of 2022, with most asset classes, including stocks and bonds, struggling to withstand the turbulence. This has prompted investors to closely monitor their portfolios.
Clients holding only traditional asset allocations may have reason to doubt their advisors' advice to "stay the course." Although patient investors' portfolios generally perform well over time, they should not have to endure significant losses along the way.
To pursue higher performance amidst broader volatility, while also shielding oneself from the risks associated with a traditional 60/40 portfolio (60% stock, 40% bond), investors can look to the Ivy League Endowment model for inspiration. Advancements in technology and distribution innovations are making it more achievable than ever before.
The Problem with the 60/40 Portfolio
Due to the current macroeconomic conditions, the traditional 60/40 portfolio no longer satisfies the usual requirements of investors. To demonstrate, we provide a review of the last couple of years indicating why this is the case:
● Starting March 23, 2020 (market bottom during COVID-related shutdowns) to the end of 2021 – the S&P 500 shot up by more than 110%. Some1 have dubbed this period the 'everything' rally, with nearly all asset classes increasing in value. Unsurprisingly, many investors did well during this time. Still, the Ivy League Endowments did much better over a similar cycle. During the 2020-2021 fiscal year ending June 30, Ivy League Endowments produced returns 12 percentage points to 32 percentage points higher than the average 60/40 portfolio.
● Then, looking at the 2021-2022 Ivy League fiscal year, the average 60/40 portfolio lost approximately 12% through June 30. By contrast, performance of the Ivy League Endowments was more resilient over this time period. According to preliminary data from varying Endowment Reports, Ivy League universities produced returns ranging from a gain of 0.8% to a loss of 7.6%.
How the Endowment Model Works
The Ivy League Endowment Model allocates 40% to 80% of a portfolio's holdings to alternative investments like private equity, venture capital and hedge funds. These investments are often complex and illiquid, requiring institutional managers with the necessary skills and experience to handle the associated risks.
Sophisticated investors, such as elite universities, have an advantage in this regard. They have access to multiple fund managers, each with ultra-high investment minimums that the average investor cannot meet. Additionally, endowments benefit from in-house investment committees and other professionals who handle critical administrative tasks like paperwork and liquidity management.
Replicating the Model
When replicating such models, it is important to adopt similar investment strategies using specialized tools and platforms that can accommodate smaller dollar amounts. However, before selecting a platform to replicate the Endowment model, clients should consider a few things:
● Platforms should allow clients to create diversified, multi-vintage, multi-strategy portfolios with as little as $250,000 across several funds without per-fund minimums.
● Beware of platforms that accept payments from fund managers for distribution. Managers should be selected based on their merit and ability to navigate multiple market cycles, not on kickbacks or distribution fees.
● Access to dozens of thoroughly reviewed funds representing a wide variety of strategies and ongoing due diligence not only of existing funds but also others for potential inclusion.
● In-house technology that provides client-facing education.
● Look for platforms with independent safeguards in place as their custodian, administrator and auditor.
Expanding Investment Horizons
The current market volatility underscores the importance of considering alternative investments. Instead of questioning why your 60/40 portfolio is underperforming, you may want to follow in the footsteps of the world's most prosperous endowments and broaden your investment horizons by incorporating alternative investments.
To learn more, please to reach out to the Impact Wealth Team.
(303) 645-4800 or Impact@ImpactWealth.com
