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Endowment Model

The Endowment Model Portfolio Strategy

College endowments such as Yale, Harvard and Stanford enjoyed excellent investment success from July 1998 – June 2019. In contrast, a large percentage of traditional investment strategies using only U.S. Stocks and Bonds produced smaller gains.

Key Endowment Model Strategy Goal:

Increase portfolio performance while, lowering portfolio volatility

Key Portfolio Changes

Diversify performance assets (assets expected to provide strong, long-term returns) away from solely U.S. stocks into low (or lower) correlation* performance oriented assets such as:

  1. Foreign developed market stocks
  2. Emerging market stocks
  3. Real assets such as real estate, commodities, and energy related holdings
  4. Private equity (holdings in private companies that do not trade on the public markets)
  5. Absolute return investments such as managed futures and hedge funds that seek to earn returns less correlated to the stock market
  6. Other low correlation assets such as debt instruments with yields linked to interest rates

Minimize bond holdings with low return expectations and unfavorable inflation exposure.

  1. Reduce traditional bond holdings
  2. Diversify remaining holdings internationally in an attempt to increase yield, raise total return, reduce currency risk, and lower inflation risk

Incorporate assets with limited liquidity that may provide higher performance and lower volatility for a given level of risk.

1) The Yale Endowment Report for years 1998-2019, Harvard University Financial Report for years 1998-2019, The Stanford Management Company Report for years 1998-2019, press releases for Yale and Harvard for June 2019 data. (Endowments measure returns from July 1st through June 30.)

2) U.S. stocks refer to the S&P500. All data used was supplied directly by Standard and Poor. Bonds returns are calculated from the Barclays Capital U.S. Aggregate Bond Index, and all bond data was supplied by Barclays Capital.

3) Correlation is a statistical measure of how two securities move in relation to each other

Hypothetical Portfolio Designs

Traditional Investor Portfolio:
60% US Stock, 40% US Bond

The portfolio seeks to emulate the general investment strategy widely employed by endowments and institutions. Diversified performance oriented assets comprise a much greater percentage of the portfolio.

Performance Assets Diversified, 40% Diversified Bonds Retained:
Seeks to Reduce Volatility and Improve Portfolio Performance

This portfolio seeks to improve performance through diversifying performance oriented assets and fixed income positions. Total bond holdings are left at the same level.

Portfolio More Similar to an Endowment:
Seeks to Improve Performance While Lowering Volatility

The portfolio seeks to emulate the general investment strategy widely employed by endowments and institutions. Diversified performance oriented assets comprise a much greater percentage of the portfolio.

Potential Improvements: Including low (or lower) correlated performance assets can decrease portfolio volatility, improve performance potential and provide more inflation protection. The bond portfolio can be diversified lessening exposure to low U.S. rates.

Potential Risks: Alternative investments may be illiquid, are not suitable for all investors, and may require larger minimum investment. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. All investments can create adverse tax consequences. All investments create the risk of loss.

Customizing: Your needs, resources, risk tolerance, and experience will differ from Endowments and Institutions. You must construct and manage your portfolio to serve your specific situation

Disclosure: The opinions in the preceding commentary are as of the date of publication and are subject to change. Information has been obtained from third-party sources we consider reliable, but we do not guarantee that the facts cited are accurate or complete. This material is not intended to be relied upon as a forecast or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. We may execute transactions in securities that may not be consistent with the report’s conclusions. Investors should consult their financial advisor on the strategy best for them. Past performance is not a guarantee of future results. Diversification and asset allocation do not assure or guarantee better performance and cannot eliminate the risk of investment loss. You should not invest in a security or investment strategy that you do not understand. There are material differences between the terms under which endowments and individuals can invest in alternative investments. These differences include, but are not limited to commissions and fees, conflicts of interest, access to investment opportunities, size, investment time horizons, and the ability to tolerate illiquidity. There is no standard or exact definition of the endowment model. Portfolio design, specific investments and ultimately performance vary considerably among endowments and investors. Kalos does not claim that any investor will achieve the same result as any endowment, institution, or other investor. Kalos' Investment Adviser Representatives have a conflict of interest when they recommend securities where they earn a commission as Registered Representatives of Kalos Capital. We address this conflict by disclosing the fees and commissions related to the investments recommended to our clients. Also, Kalos representatives do not earn both advisory fees and brokerage commissions on the same assets.

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