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Introduction
The US University Endowment Funds (US Endowment Funds), such as Harvard and
Yale, have been leaders in diversified multi-asset class investing for over two decades.
Through this approach to investing and with a large exposure to alternative asset
classes, they have consistently achieved attractive annual returns with moderate
risk. This paper explores whether investors can benefit by applying these investment
principles to their own portfolios.
The rationale for investing across multiple asset classes is
supported by Modern Portfolio Theory. This theory, developed
by Nobel Prize winner Harry Markowitz, demonstrates that the
risk-adjusted returns of a portfolio can be improved by
diversification across assets with varied correlations. Modern
Portfolio Theory is at the heart of the investment philosophy
of the Harvard and Yale University Endowment Funds, and is
the foundation upon which their portfolios are constructed.
In their seminal study into the importance of asset allocation,
Brinson, Hood & Beebower (1986) and Ibbotson et al (2000)
determined that the vast majority of the variability of a
portfolios returns emanated from the long-term or strategic
asset allocation of the portfolio (Table 1). Therefore, an investor
constructing an indexed portfolio with a similar asset allocation
to the Super Endowments of Harvard and Yale should, in
theory, achieve similar return/risk characteristics to these
successful investors.
Research
Brinson
(1991)
Ibbotson
(1999)
Ibbotson
(2000)
Percentage
94%
92%
81%
88%
Active Return
-1.1%
-0.1%
-0.3%
-0.4%
Source: Gary P. Brinson, L Randolph Hood and Gilbert l. Beebower, Determinants of a Portfolio
Performance, The financial Analysts Journal, July/August 1986
Roger G. Ibbotson and Paul D. Kaplan, Does Asset Allocation Policy Explain 40%, 90% or 100%
of Performance?, The Financial Analysts Journal, January/February 2000
FRONTIER GOTTEX
Overview
University Endowment funds are non-taxable vehicles
established to contribute towards the future funding
requirements of colleges and universities. Their funding comes
from a combination of legacies, gifts and investment returns.
They employ an investment philosophy focused around
diversification whilst taking advantage of a long term investment
time horizon which allows them to invest a portion of capital in
less liquid assets whilst also being tolerant of market volatility.
This in turn ensures the pursuit of long term investment themes
as opposed to reacting to shorter term market movements.
In the US in 2014, there were 832 Endowments which
represented $516 billion in combined endowment assets; the
largest fund being Harvard University with $36.4 billion under
management.
4%
21%
10 Yr
R (A)
15 Yr
R (A)
20 Yr
R (A)
0%
7.1%
5.3%
8.8%
30%
7.1%
7.6%
44%
10.9%
40%
9.4%
44%
10.0%
11.1%
13.1%
Real Assets
8%
Absolute Return
13%
Cash
48%
8%
8%
13%
19%
8%
9%
0%
10%
Commodities &
Natural Resources
8%
21%
Global Equities
Domestic Equities
19%
Private Equity
10%
18%
Emerging Equity
8%
9%
Global Bonds
9%
Emerging Bonds
4%
Cash
AA*
%
Bonds
21%
48%
9%
18%
21%
4%
Equity
Super
Endowments
10%
Endowment
Funds > $1bn
8%
Average US
Endowment Fund
6%
4%
US Equity/Bond
Portfolio (60:40)
2%
0%
0%
10%
20%
30%
40%
50%
FRONTIER GOTTEX
Harvard
Yale
60:40
Size ($ billion)
36.4
23.9
N/A
15.4%
20.2%
16.5%
10 Yr Ann. Returns
8.9%
11.0%
7.1%
15 Yr Ann. Returns
9.8%
12.4%
5.3%
20 Yr Ann. Returns
12.3%
13.9%
8.8%
S. Blyth
D. Swensen
Multi-Asset
Multi-Asset
Equity/Bond
Manager
Investment Style
80%
2000
2014
44%
Equity
42%
Emerging Bonds
16%
Bonds
10%
50%
Global Bonds
14%
Real Assets
28%
40%
Emerging Equity
12%
Alternatives
16%
30%
Private Equity
5%
Cash
0%
Real Estate
60%
20%
US Equities
10%
Global Equities ex US
0%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-10%
the asset allocations of the Super Endowments have been very stable over-time
changing by an average of only 5% per year over the past fifteen years.
FRONTIER GOTTEX
Equity
Bonds
16%
Real Assets
6%
16%
Absolute Return
9%
Cash
10%
48%
28%
6%
9%
26%
8%
8%
1%
18%
Commodities &
Natural Resources
10%
Hedge Funds
16%
0%
0%
Global Equities ex US
26%
US Equities
18%
Private Equity
8%
8%
Emerging Equity
Global Bonds
9%
Emerging Bonds
Managed Futures
Cash
Methodology
The first step was to take the average annual asset allocation
of Harvard and Yale at yearly intervals from July 1999 to June
2014. The only asset allocation adjustments made were to
reallocate Cash so that the portfolio could be directly
comparable to a fully invested portfolio. Further analysis of the
underlying exposures of Harvard and Yale allowed us to divide
their Equity and Fixed Income allocation into domestic, global
and emerging components.
For Equities, we used a blend of large, mid and small cap
indices. Both Harvard and Yale tend to employ active managers
and anecdotal evidence from their annual reports indicates
that these managers have a mid and small cap bias. For Private
Equity we use both the Cambridge Associates Index and the
LPX 50 Index/Russell 2000 Index as a liquid Private Equity
proxy. Real Estate exposure is US based for the first 5 years
and then moves to a global Index as evidence points to a
domestic bias during the first 5 years. Commodities and
Natural Resources exposure is a blend of both a futures based
index and an equity based index. The asset allocation for 2014
is presented in Chart 4 and places 56 per cent of the portfolio
in equity/bond asset classes with the remaining 44% allocated
to alternative asset classes.
To calculate the performance of the portfolio, a representative
index was selected for each asset class (see appendix A), and
portfolio returns were calculated by multiplying asset class
weights by index returns. Portfolio returns were calculated in
USD from July 1999 to June 2014 (15 years) and rebalanced
annually every 30th June. For comparison purposes, an
Endowment Index Portfolio hedged into GBP was also
calculated. All returns are shown gross of management fees
and access costs. The resulting performance of the Endowment
Index Portfolio is shown overleaf in Table 4 and the annual
returns are shown in Chart 5.
Yale
Harvard
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1999
2000
-25%
FRONTIER GOTTEX
15 Yr Return
(Annualised)
15 Yr Volatility
(Annualised)
Return/
Volatility Ratio
10 Yr / 15 Yr Avg %
of Return Captured
10.0%
11.1%
14.4%
0.8
10.8%
12.1%
14.2%
0.9
9.4%
8.2%
7.1%
7.6%
9.7%
9.5%
12.7%
0.7
92%
8.7%
8.7%
14.6%
0.6
83%
7.8%
4.3%
17.1%
0.3
7.1%
5.3%
9.5%
0.6
10.6%
10.6%
12.7%
0.8
92%
9.6%
9.8%
14.5%
0.7
83%
8.6%
4.7%
15.7%
0.3
8.0%
5.5%
8.7%
0.6
4.6%
3.6%
7.0%
0.5
6.6%
4.1%
11.1%
0.4
IA Global Sector
6.9%
3.3%
15.4%
0.2
Summary
FRONTIER GOTTEX
Appendix A
Appendix B
Asset class index returns used are gross and have not been
adjusted for management fees, administration and access
costs.
Asset Class
Benchmark
US Equities
Global Equities
(Ex-US)
Emerging Equities
Private Equity
Emerging Bonds
Real Estate
Commodities
Absolute Return
Benchmarks
US Equities
US Bonds
UK Equities
1.
UK Bonds
2.
3.
4.
5.
6.
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