SCOTT L. OLSON: Endowment-Style Investing Offers Stability With Less Volatility

By  //  December 17, 2015

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…But what do the Largest Endowments know about Investing?

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With 36 years’ experience in Financial and Estate-Planning, Wealth Preservation and Wealth Transfer, Scott Olson has been a popular speaker across the U.S. to groups of Attorneys, CPAs, Financial and Estate Planning professionals. He provides Continuing Education courses to Attorneys and CPAs.

Endowment-style investing is an asset allocation methodology which seeks to generate high risk-adjusted returns with lower volatility by expanding the number of asset classes and strategies used to create a portfolio.

Rather than just two main asset classes of stocks & bonds (including funds which own stock and bonds) Endowments and many wealthy investors have expanded their portfolios to include Alternative Investments such as Real Estate, Oil & Energy Drilling and Royalties, Hedge Funds, Private Equity, Private Debt, and Real Assets, in addition to traditional stocks and bonds.

This type of investing is most widely attributed to major university endowments such as Yale, Harvard and Johns Hopkins University, and therefore, is often referred to as endowment-style investing.

What is an Endowment?

An Endowment represents an institution’s investments and is typically organized as a public charity, private foundation or trust. Institutions that commonly have endowments include colleges and universities, museums, hospitals, large specialty clinics and religious organizations.

Yale and Harvard Endowments have had the most notoriety, both having been very public about their ACTIVELY managed portfolios, stellar performances and their wide variety of allocated assets.

According to their annual reports they will re-allocate in, and out almost entirely from asset style to asset style as their advisors recommend.

LARGE ENDOWMENTS, which have significant allocations to alternative investments, generally outperformed traditional investments such as stocks and bonds over the past 10 years.

LARGE ENDOWMENTS, which have significant allocations to alternative investments, generally outperformed traditional investments such as stocks and bonds over the past 10 years.

Why Endowments invest in Alternative Assets?

Over half of the typical Endowment portfolio is invested in alternative investment strategies. As of June 30, 2012, the Average Endowment allocated 52% of its total portfolio to alternative investments.(1)

Yale University’s Endowment, widely considered the pioneer in Alternative investing, has allocated more than 65% of its portfolio to alternative investments.(2)

Endowments have out-performed Traditional Investments

Large Endowments, which have significant allocations to Alternative investments, generally outperformed traditional investments such as stocks and bonds over the past 10 years.

The figure at left compares 10-year investment returns for Endowments against the S&P 500 and an investment grade bond index. Notice how the larger Endowments held a considerably higher portion of Alternative assets and achieved higher returns.(1)

Why have Endowments Outperformed Traditional Investments?

Two factors help to explain the performance gap between Endowments and traditional investments:

• The Alternatives effect: By investing in Non-Correlated, Less-liquid, or Non-Liquid Alternatives, Endowments are typically able to construct a higher yielding portfolio with less correlation to the broader markets. Non-Correlated, Less-Liquid or Non-Liquid Alternative assets typically do not have the volatility of traditional stocks, bonds and funds. They don’t get caught up in the wild, volatile swings of the stock markets.

• The Quality of the Manager: Illiquid, alternative investments are more difficult to evaluate than publicly traded securities. Skilled managers that are adept at taking advantage of pricing inefficiencies in illiquid securities will have a greater impact on returns than skilled managers operating in the public markets, where price inefficiencies are fewer in number and there is generally less return potential.

Why don’t Individuals invest more heavily in Alternatives?

TYPICAL ENDOWMENT PORTFOLIO: Source: National Association of College and University Business Officers and Commonfund Institute. Data includes asset allocations for U.S. Higher Education Endowments and Affiliated Foundations with assets under management of at least $1 billion in fiscal year 2012.

TYPICAL ENDOWMENT PORTFOLIO: Source: National Association of College and University Business Officers and Commonfund Institute. Data includes asset allocations for U.S. Higher Education Endowments and Affiliated Foundations with assets under management of at least $1 billion in fiscal year 2012.

While many institutions invest heavily in Alternatives to build diversification, stability and generate higher returns, most individual investors have historically lacked access to Alternatives due to, among other things, high investment minimums. Over the past several decades this has changed.

Investor Access to popular Alternatives has Improved

Individual investors have longed for higher income, better overall returns, more stability and less volatility, however a small percentage of financial advisors have these asset classes available to their clients.

Typically, the largest investment companies, wire-houses and broker-dealer firms do not have these popular assets.

Could this be because the some larger firms make their money by selling stocks and bonds to their clients, then later trading that same dollar out of the first stock into another, then another then another.

Notes: 1. 2012 NACUBO-Commonfund Study of Endowments; 2. As of June 30, 2012. Investments include allocations to Natural Resources, Private Equity and Real Estate.
– Past performance is not indicative of future results. Not an offer to buy or sell any security. Senior Secured Debt offerings and CLO’s only offered by prospectus and like all investments, have varied levels of risk. Many alternative investments are Private Placements and/or Partnerships, may be speculative and are only offered to accredited investors.

ABOUT SCOTT L. OLSON

Scott Olson

Scott Olson

For more information on Endowment-Style Investing Scott L. Olson can be reached at (321) 751-5599 or Toll-free (800) 779-4744, e-mail Scott@AtlanticFinancialAdvisors.com, or LinkedIn/AdvisorScott. With 37 years’ experience in Financial and Estate-Planning, Wealth Preservation and Wealth Transfer, Scott has been a popular speaker to groups of Attorneys, CPAs, Financial and Estate Planning professionals.   He provides Continuing Education to Attorneys and CPAs and has presented at the Florida Bar Tax-Section annual conference, and their 1-hour March CLE teleconference.   Not an offer to buy or sell any security or insurance product. Securities & Investment Advice offered through Financial West Group – member FINRA/SIPC.  Atlantic Financial Advisors, LLC, Registered Investment Advisor not FWG affiliated.


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