Pragmatic Observer

An Endowment Portfolio From Publicly-Traded Vehicles

Mark,
Ooops! Sorry about that. I actually saw that same reference made some time ago on a discussion board on Morningstar's web site. They were throwing out ideas on this very subject and someone made that same connection. I'll check it out. That makes things a little simpler since the IPRV.L could be problematic to access.

Mebane,
Is IPRV.L available in the US and if so, where can one find information on it?

An Endowment Portfolio From Publicly-Traded Vehicles

Anyway, back to Mebane’s original question, earlier in the week, “I would like to hear your comments on the allocation.” Based on the 2006 Yale Endowment here is what they have done and how you could do it with Mebane’s suggestions and those that have been thrown into the mix this week. This is sticking strictly to Swensen’s definitions (or nearly) for each of the asset classes as described in the 2006 Yale report, and is specific to Endowment investing. There are certainly many other options, but here goes.

ABSOLUTE RETURN 25%
5% DIAMX Diamond Hill Long-Short
5% ARBFX Merger Arbitrage
5% HSGFX Absolute Return
5% JAMNX Market Neutral
5% TAVFX Third Avenue Value

DOMESTIC EQUITY12%
6% SPY US Large Cap
6% IWM US Small Cap

FIXED INCOME 4%
4% TIP US TIPS

FOREIGN EQUITY 15%
7.5% EFA Foreign Developed
7.5% EEM Foreign Emerging Markets
Note; Swensen has alluded to going 50% into emerging markets.

PRIVATE EQUITY 17%
10% IPRV.L Private Equity Fund
3.5% BAM Brookfield Asset Management
3.5% ACAS American Capital Strategies (or any of several others)

REAL ASSETS 27%
6% IYR US REITs
6% RWX International REITS
5% DJP Commodities
5% GSP Commodities
5% VAW Vanguard Raw Materials (or other similar options)

However, keep in mind that Swensen recommends an asset allocation of 70% stocks and 30% bonds/income for the “average investor”. The breakdown is:
20% Real Estate
20% Foreign
30% US Equities

An Endowment Portfolio From Publicly-Traded Vehicles

DIAMX is available with no transaction fee at Charles Schwab and TD Waterhouse, among others. They do have a $10,000 minimum investment. Schwab also has a long-short fund (SWHEX) which has actually outperformed DIAMX year to date (DIAMX; -0.7% vs SWHEX; +5.0%) and ANGLX (+3.94%). DIAMX has the better long term (3+ years) return. ANGLX has the lowest fees (1.31%) with Schwab having the highest (1.76%).

Since Private Equity is the most difficult asset class for the average investor to access, here are a couple more alternatives to consider.

MVC (up 39% YTD with a PE of 6.5); CSWC (up 38% YTD with a ROE of 31.3); ACAS up 45% in one year with a yield of 5.6% and a PE of 7.8); TICC (up 27% in one year and yield of 8.6%) along with MIC (up 70% in the last year and a yield of 4.9%) are all involved in private equity purchases and financing. Any thoughts on these?

Swensen also includes investments like natural resources, timber, and other commodities in his Real Asset grouping. DJP and GSP are excellent ETF choices. GSP is more heavily weighted in oil and gas. You could include a mutual fund like US Global Resources (PSPFX; also heavy on oil and gas) which is up over 15% YTD, or Vanguard Raw Materials ETF (VAW) up 31% in the past year. In the Real Estate group Alpine International Real Estate mutual fund (EGLRX) has outperformed the US market this year (+13.1% vs ICF down 3.7%) and the international real estate REIT (RWX) which has returned 8.2%.

As always, it is important to understand that while these alternative asset classes have done very well in the past few years, they will not always lead the way. Nonetheless, they have done MUCH better than the US markets, which everyone is all excited about now, and do offer excellent diversification options along the lines that Swensen recommends.

Just a few ideas. Any comments or suggestions?

An Endowment Portfolio From Publicly-Traded Vehicles

I've been fascinated by work in this area for the past couple of years and have spent a lot of time researching some of the same investment vehicles listed in your article and applying them to the latest (2006) Yale Endowment model. However, I have found that many of the mutual funds available have very high expenses and relatively low returns during many market cycles.
HSGFX +.13% YTD 1.14% Exp Ratio
TFSMX +5.3% YTD 2.49% Exp
JAMNX +3.2% YTD 1.95% Exp
ARBFX +3.9% YTD 1.95% Exp
DIAMX +1.0% YTD 1.51% Exp

Yes, they do indeed offer diversification, but at what price, and for what kind of return, over the long haul? A couple of ideas to add to your research.

You have the US, Foreign, REIT and Commodities covered. The Absolute Return and Private Equity are the problems for the average investor trying to replicate the Yale Endowment. Here are a couple of things I've considered.

1) In the Private Equity area, consider holding such stocks as Brookfield Asset Management (BAM: plus 33% vs plus 7% for the S + P 500 YTD), Leukadia (LUK: plus 20% YTD ) and Macquarie Infrastructure (MIC; plus 24% YTD) among others, as well as Berkshire Hathaway B shares. Now granted, all are publicly traded but all are asset management firms which allow for managing assets beyond the realm of publicly traded companies and shares. If you look at their investment approaches they are not unlike endowments and hedge funds, and even merger and acquisition firms...with much better returns and much lower expense ratios.

2) Could you do an asset allocation, using your proposed funds, using the most recent Yale Endowment allocations, and back test it for five or ten years. This would be fascinating to see how it stacks up.

Keep up the great work. Looking forward to more on this subject.
Paul