Single family offices and multifamily offices focus on wealth diversification and preservation over multiple generations. The importance of that mindset is brought back to the forefront of our minds every time there is a shock in the equities markets. Wealth management, preservation, and growth often relies upon the “model portfolio” proven by David Swensen when he served as the chief investment officer for Yale’s endowment. The portfolios he inspired include the following components: absolute return, domestic equity, fixed income, foreign equity, leveraged buyouts, natural resources, real estate, venture capital, and cash.
The mix of these assets in Yale’s endowment portfolio has followed a general trend that reflects how Yale’s investment managers have been able to optimize the returns over years of careful analysis. The absolute returns component of the portfolio is approximately 25% of the assets; up from 20%. Domestic equity is 4%. Fixed income is also 4%. Foreign equity is 15% of the portfolio. Leveraged buyouts make up 15% also. Natural resources have an approximately 8% share. Real estate stands close to 10% and venture capital stands just shy of 20%, with the balance in cash. Let’s explore a few that might not be as familiar to you as domestic and foreign equities might be.
Absolute return are proprietary hedge funds, closed end funds, mutual funds, or exchange traded funds (ETFs) that seek portfolios of uncorrelated assets. They might focus on the broad market or specific industries. For example, in the charts below you can see an ETF that tries to achieve an inverse price to oil and gas assets. The second example is a fund by Putnam Investments with 750+ assets designed to trade in a bounded range for a target return. One share purchased in 2009 for $10 is still worth $10.48 on March 20, 2020. In the intervening period it also paid $3.55 in dividends.
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Fixed income includes government bonds and corporate bonds. These funds and ETFs tend to differentiate based on the risk exposures they select. Some funds may seek greater emerging market exposure, while others may create portfolios of corporate bonds. For example, in the chart below you can see five years of performance for Legg Mason’s Western Asset High Income Opportunity Closed End Fund. While the fund was significantly sold off in the midst of the Q1 2020 market turmoil, it was paying $0.03 per share in dividends each month. Certificate of Deposit (CD) ladders are another potential strategy whereby you deposit funds in a CD each month with the same maturity (e.g., 182 days, one year).
Leveraged buyouts are a type of private equity (PE) where PE firms or business development companies use their own cash, borrowed funds, sellers notes, or stock to purchase an asset. Frequently it is a company, but other income-producing assets could also be the target. There are different ways they can participate: a) be the purchaser, b) be the lender to another purchaser, c) be a syndicate member in a group of lenders, or d) run a fund of funds that invest in other private equity firms that perform buyouts. The purchaser could be an individual, firm, or partnership. PE firms will often serve as the independent sponsor of a deal and invite in other investors. The PE firm serves as the general partner (GP) and the others are limited partners (LPs).