The Investment World is Evolving

Historically, a traditional portfolio has been comprised of stocks, bonds, and cash. Traditional portfolios can produce solid returns at times but rely on appreciating or stable prices. However, the past decade has painfully reminded investors that prices can decline, sometimes sharply. So what does an investor do?

Some of the brightest investment minds are employed by large college and university endowments. In the past, these institutions allocated the vast majority of their portfolios to traditional investments (stocks, bonds, and cash). However, that mix of assets often did not provide the desired risk reduction when trying to grow and preserve capital. 

During the last two decades, the investment focus of larger endowments ($1 billion and above) has shifted to a greater allocation of low-correlating assets to help them reach their investment objectives. The pie charts below illustrate how these endowments have changed the way they invest, embracing low-correlating investments while reducing exposure to traditional stocks and bonds.

The good news is, many of those low-correlating investment solutions are now available to all investors.

Growth of Low-Correlation Investments 
 
 
Low-correlating investments are comprised of many different assets such as managed futures, hedge funds, real estate, and private equity. These investments historically have shown relatively low correlation to stocks and bonds (meaning the returns moved independently) and have the ability to potentially profit when stocks and bonds are declining.

 

Many investors have less than 5%** of their portfolio allocated to low-correlating assets. Many of the low-correlating investment solutions utilized by endowments and universities are now available to all investors.

Source: 2018 NACUBO-Commonfund Study of Endowments, www.nacubo.org. Data is based on endowments with greater than $1B in investment assets.
**Source: April 2017 Blackstone White Paper “Seeking an Alternative - Understanding and Allocating to Alternative Investments.” Specific allocation percentages forabove institutions were sourced through each individual University’s website.

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Diversification does not assure a profit nor protect against loss in a declining market.