Markets have dropped off a cliff since the beginning of the year, with most asset classes—including everything from equities, to bonds, to cryptocurrencies—taking it on the chin. It’s enough to make any investor fret over the health of their portfolio.
More than that, though, it’s an environment where clients with nothing but traditional asset allocations have good reason to doubt advisors who tell them to stay the course. True, patient investors typically do well over time. Yet that doesn’t mean they should have to endure steep losses along the way.
So, how can you help clients pursue alpha amid broader volatility while shielding them from the current risks associated with the traditional 60/40 portfolio? Have them invest like an Ivy League endowment. Most advisors will say that’s not feasible. But innovations in technology and distribution are increasingly making it more possible than ever before.
Why the 60/40 Portfolio Isn’t Enough
The 60/40 portfolio, unfortunately, no longer meets the needs of investors in this volatile macro environment. A review of the last couple of years demonstrates clearly why this is the case.
From March 23, 2020 – the market bottom during the COVID-related shutdowns—to the end of 2021, the S&P 500 shot up by more than 110%. Some have dubbed this period the ‘everything’ rally, with nearly all asset classes imaginable escalating in value.
Naturally, most 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.
More recently, looking at the 2021-2022 Ivy League fiscal year, the average 60/40 portfolio had shed approximately 12% through June 30. By contrast, the performance of the Ivy 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 involves investing anywhere from 40% to 80% of a portfolio’s holdings in alternative investments, like venture capital, private equity and hedge funds. Aside from being illiquid, many of these vehicles have a high degree of complexity and other risks, which puts a greater emphasis on the skill and experience of institutional managers.
Elite universities and other sophisticated investors can access institutional managers directly due to their large social networks and deep pockets. They also benefit from having access to multiple fund managers, each of whom has ultra-high investment minimums that most investors could never meet. Moreover, endowments have in-house investment committees and other professionals who take care of crucial but often administrative overlooked issues like executing the proper paperwork and liquidity management.
Virtually, no financial advisor could do all these things themselves for their clients who are not endowments or other institutional investors. Luckily, new platforms have emerged that can both extend alts access to a broader group of investors without exposing them to greater risks and make the investment management process for advisors simpler.
Replicating the Model
Replicating such models requires adopting similar investment strategies to the above but using specialized tools and platforms that accommodate smaller dollar amounts. To be sure, the democratization of alts has been underway for some time, but this process takes it to the next level.
Before choosing a platform to replicate the endowment model, we think advisors should be mindful of a few things.
- Platforms should provide advisors with the ability to create diversified, multi-vintage, multi-strategy client portfolios with as little as $1 million of investable assets across several funds without per-fund minimums.
- Beware of a platform accepting 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.
- Advisors should be able to maintain discretion over client portfolios versus relinquishing that control to another manager affiliated with the platform.
- Access to dozens of thoroughly reviewed funds representing a wide variety of strategies
- Ongoing due diligence not just of existing funds but others for potential inclusion.
- In-house technology that provides not only advanced, advisor-facing analytics but client-facing education.
- Look for platforms that have independent safeguards in place as their custodian, administrator, and auditor.
An Expanding Investment Ecosystem
In today’s volatile market environment, the reasons advisors should consider alternative investments are adding up fast. Rather than wait for clients to ask why their 60/40 portfolio returns are faltering, advisors can emulate what some of the world’s most successful endowments have been doing for years by beginning to expand their investment ecosystem to include alts.
Steven Brod is CEO of Crystal Capital Partners, an alternative investments platform for financial advisors.