Endowment Investment Philosophy

Most investors think in terms of two dimensional portfolios comprised of stocks and bonds. Endowments expand their portfolio to include a third dimension by using alternative investments. The primary benefit of using alternative investments in a portfolio is to augment the risk-adjusted returns provided by a two dimensional stock-bond portfolio. The portfolios of large charitable institutions and major universities are often managed by utilizing alternative investments.

As an example, Harvard University’s endowment as of June 30, 2015, was valued at $37.6 billion, making it the single largest university endowment. Its long-term performance over the last 10 and 20 year periods ending June 30, 2015 was 7.6% and 11.8% per year as compared to a two dimensional 60:40 stock-bond portfolio (using the S&P 500 Index and the Barclays Aggregate Bond Index) which provided 6.8% and 7.9% average annual returns per year, respectively over those same time periods (source: Harvard Management Company Annual Report 2015).

Moreover, a two dimensional stock-bond portfolio declined 30.8% from peak-to-trough over the period January-2000 to December-2012. A three dimensional portfolio with equal allocation to the three asset classes lost 23.2% (using the S&P 500 Index, Barclays Aggregate Bond Index and the Dow Jones Credit Suisse Hedge Fund Index). Moreover, the annualized volatility of the three dimensional portfolio was 6.5% as compared to the two dimensional portfolio at 9.2% (Data Source: Morningstar).

What is the Endowment Investment Philosophy?

The Endowment Investment Philosophy builds portfolios using an asset allocation methodology pursued by major universities like Yale and Harvard because it offers the potential for superior risk-adjusted returns and lower volatility through all market cycles. This investment philosophy expands the number of asset classes and strategies used to create a portfolio by including alternative investments such as hedge funds, private equity, and real assets in addition to traditional stocks and bonds in a global framework.

The increasing use of alternative investments by Harvard University’s Endowment is reflected in the following table, which shows the evolution of their policy portfolio.

Policy portfolio-EIP page
(Source: Harvard 2014  Annual Report)

As can be seen in the table above, the percentage allocation to alternative investments has increased from 25% in 1995 to almost 57% in 2014.

How do we implement the Endowment Investment Philosophy?

We utilize the Endowment Investment Philosophy  in building client portfolios in two primary ways, or a hybrid of both, based on the clients accredited investor status:

  • The first implementation strategy utilizes illiquid alternative investments like private equity, hedge funds, and real assets. This is the preferred methodology for the larger college endowments like Harvard and Yale Universities as well as Ultra High Net Worth clients to implement their investment portfolios. This allows the investor to potentially capture the significant illiquidity premium that has historically been in excess of 5% annually for these investments.
  • The second methodology utilizes liquid alternative investments. The recent proliferation of Exchange Traded Products, primarily using Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs), has allowed us to build portfolios using liquid alternative investments. Asset styles and strategies that are not presently available in Exchange Traded Funds/Notes are implemented using Mutual Funds and/or Closed End Funds.
  • The third methodology is a hybrid model that utilizes a combination of illiquid and liquid alternative investments.

The Three Dimensional Approach allocates investments into the Growth/Income/Risk-Managed segments

We believe that most investor’s financial goals can be achieved by maintaining an investment allocation to Growth, Income and Risk Managed investment segments:


This segment of the portfolios includes allocations to mostly liquid Global Equities (including Emerging Markets) in addition to Private Assets, which helps to capture some of the illiquidity premium.


This segment includes allocations to fixed income securities that can provide a steady source of income.  Additionally, it can also include equity type higher yielding securities like Master Limited Partnerships, Business Development Companies, Preferred Stock, Real Estate Investment Trusts, and Convertible Debt.

Risk Managed:

This segment includes both tactical and strategic allocations to alternative investments like private equity, hedge funds and real assets, whose objective is to achieve equity type returns with bond type volatility.

Endowment Index

We use a proprietary Endowment Index to benchmark all our client portfolios.