Market Commentary

'Market Commentaries' is the long-running series of articles authored by Daniel Wildermuth, President and CEO, Kalos Financial. Mr. Wildermuth shares his in-depth knowledge of the market as it relates to national and international events, and their effects on the investment world. Sign up to receive the monthly updates below.
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Endowment Model Overview2019-05-21T12:40:02-05:00

The Endowment Model Portfolio Strategy

College endowments such as Yale, Harvard and Stanford enjoyed excellent investment success from July 1998 – June 2018.

In contrast, a large percentage of traditional investment strategies using only U.S. Stocks and Bonds produced smaller gains.

Kalos Financial Atlanta Endowment Model Overview Portfolio Returns graph through June 2018

Key Portfolio Changes

Diversify performance assets (assets expected to provide strong, long-term returns) away from
solely U.S. stocks into low (or lower) correlation3 performance-oriented assets such as:

  1. Foreign developed market stocks
  2. Emerging market stocks
  3. Real assets such as real estate, commodities, and energy related holdings
  4. Private equity (holdings in private companies that do not trade on the public markets)
  5. Absolute return investments such as managed futures and hedge funds that seek to earn returns less correlated to the stock market1
  6. Other low correlation assets such as debt instruments with yields linked to interest rates

Minimize bond holdings with low return expectations2 and unfavorable inflation exposure

  1. Reduce traditional bond holdings3
  2. Diversify remaining holdings Internationally in an attempt to increase yield, raise total return, provide currency diversification, and lower inflation risk

Incorporate assets with limited liquidity that may provide higher performance and lower volatility for a given level of risk.

The Key Endowment Model
Portfolio Strategy Goal

Increase portfolio performance while
lowering portfolio volatility

1. The Yale Endowment Report for years 1997-2017, Harvard University Financial Report for years 1997-2017, The Stanford Management Company Report for years 1997-2017, press releases for Yale and Harvard for September 2017 data. (Endowments measure returns from July 1st through June 30.)
2. U.S. stocks refer to the S&P500. All data used was supplied directly by Standard and Poor. Bonds returns are calculated from the Barclays Capital U.S. Aggregate Bond Index, and all bond data was supplied by Barclays Capital.
3. Correlation is a statistical measure of how two securities move in relation to each other.

Hypothetical Portfolio Design:

Traditional Investor Portfolio:
60% US Stock, 40% US Bond

Performance Assets Diversified, 40% Diversified Bonds Retained: Seeks to Reduce Volatility and Improve Portfolio Performance

Portfolio More Similar to an Endowment: Seeks to improve performance while lowering volatility

Wildermuth Advisory Atlanta Hypothetical Portfolio Design US stocks bonds
Wildermuth Advisory Atlanta Diversified Bonds
Wildermuth Advisory Atlanta Endowment Portfolio

Traditional 60% stock and 40% bond portfolio commonly employed by many investors.

This portfolio seeks to improve performance through diversifying performance-oriented assets and fixed income positions. Total bond holdings are left at the same level.

The portfolio seeks to emulate the general investment strategy widely employed by endowments and institutions. Diversified performance-oriented assets comprise a much greater percentage of the portfolio.

Potential Improvements:

Including low (or lower) correlated performance assets can decrease portfolio volatility, improve performance potential and provide more inflation protection. The bond portfolio can be diversified lessening exposure to low U.S. rates.

Potential Risks:

Alternative investments may be illiquid, are not suitable for all investors, and may require larger minimum investment. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. All investments can create adverse tax.

Customizing:

Your needs, resources, risk tolerance, and experience will differ from Endowments and Institutions. You must construct and manage your portfolio to serve your specific situation.

Kalos Financial