Endowment Model

Some of the most sophisticated investors run large endowment funds for academic institutions like Stanford, Yale and Harvard. Over the last xx years, the largest endowments have out performed the S&P 500 by xx% annually. (Maybe make this a cumulative out performance??) By large measure this is due to their commitment to non-traditional investments like Hedge Funds, Private Equity, Real Estate Master Limited Partnerships and the like. (Alterative Investments) Historically many of these investments have not been available to individual investors due to SEC regulations, their legal structures, minimums and illiquidity. However in the past few years Alternative Managers have created vehicles which enable individual investors to participate. We believe these markets offer wealthy investors significant advantages, and that the investment experience of Endowments is extremely relevant. Here’s why:

Endowment Investment Objectives Mirror Those of Wealthy Individuals

Endowments certainly control more money that most of us, but their investment objectives are surprisingly similar to those of wealthy individuals. Endowments can’t afford to lose significant principal, they require steady and growing cash flow to fund their current and future expenses, and their investments must support current needs and the needs of future generations.

How Do They Invest?

The term, The Endowment Model, can traced back to the early 1970s, and was later institutionalized in Pioneering Portfolio Management, a book published in 1999 by David Swenson, Chief Investment Officer of Yale University. Today it describes the following investment strategies:

  • Take advantage of the long time horizon that Endowments (and wealthy individuals) have—since the bulk of the assets will be passed to the next generation.
  • Monitor, but do not necessarily react, to short-term events and trends in the market.
  • Seek the higher returns available from equities, which are more volatile in the short run but outperform over time.
  • Invest a portion of the portfolio in Alternative Investments. While Alternative Investments are often less liquid, long term investors benefit from their positive returns over time and the important portfolio diversification they provide which lowers overall portfolio risk, insures that current income is available to fund current expenses, and maximizes appreciation over time.
How Have They Done?

INSERT CHART ON ENDOWMENT RETURNS