Institutional investors have evolved over time from a traditional 60/40 split between stocks and bonds, to a different implementation that includes a variety of uncorrelated, high return asset classes and reduced reliance on lower-returning fixed-income instruments. This philosophy has become known as the endowment model. The goal of the endowment model is to reduce volatility and increase long-term returns.

Asset Classes: Class Returns and Inflation + 5%

The “free lunch” provided by investing in alternatives comes from the ability to add diversification and reduce volatility without reducing investment returns. The endowment model focuses on investing in multiple asset classes with a projected return profile above inflation + 5%. The green shaded area to the right represents a theoretical basket of alternatives having the ability to provide for sustainable returns while potentially reducing volatility.

The graph to the right shows the hypothetical value of $1 invested in 1926. The returns used are purely hypothetical and for illustrative purposes only. Please see our definitions page for source information. 

Asset Classes information graphic

Alternatives: Alternative Asset Classes

Real Assets
This asset class provides our portfolio with inflation protection and high visibility into future cash flow. The drivers of value creation within oil and gas, timber, infrastructure and real estate are powerful diversifiers within our portfolio.

Private Equity
Properly selected investments in leveraged buyouts and venture capital have the potential to generate high returns relative to other equity alternatives, providing a means to enhance overall portfolio results.

Absolute Return
Absolute return and hedging proxies can provide returns that are independent of the broad market indicies. But unlike fixed income, they may generate higher long-term real results.

Alternatives information graphic

Correlations: Uncorrelated Asset Classes

We attempt to diversify among asset classes that are uncorrelated to each other and the overall economy in order to achieve a “smoother” return line up and to the right. We focus our attention on determining the underlying economic driver of each asset class to help reduce client exposure to any one singular economic event.

Correlations information graphic