Investment Strategies

The Investment World is Evolving

Historically, a traditional portfolio has been comprised of stocks, bonds and cash. Those traditional portfolios can produce solid returns at times, but rely on prices to appreciate. As the past decade has painfully reminded investors, price appreciation is not always a given. So what is an investor to do? Let's take a look at portfolio diversification using low-correlating or non-traditional investments.

Some of the brightest investment minds are employed by large endowments and universities managing large pools of money for the endowment. 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 wealth. 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 these low-correlating investment solutions are now available to all investors.

Growth of Low Correlating Investments in Endowments and Universities



Source: 2015 NACUBO-Commonfund Study of Endowments, Data is based on endowments with greater than $1B in investment assets.


Seeking a Better Way to Approach Investing

The growth in popularity of low-correlating or non-traditional investment solutions in recent years has essentially created a distinct asset allocation class within institutions and university endowments. And now, these same low-correlating investment solutions are becoming more common in individual investor portfolios. The reason for this is the potential ability to reduce risk by providing other ways to generate returns outside of stocks and bonds.

Investment of $1,000 As of 12/31/15


This chart illustrates the maximum drawdowns of three different portfolios from August 1, 2007 to December 31, 2014. Stock portfolio invests in MSCI World Index. Stocks/Bonds portfolio invests in 70% MSCI World Index and 30% Barclays Aggregate Bond Index. Diversified portfolio invests in 40% MSCI World Index, 30% Barclays Aggregate Bond Index, 10% CISDM Equity L/S Index, 10% Morningstar L/S Commoditiy Index, and 10% Barclays CTA Index. All portfolios assume reinvestment of dividends and capital gains, but do not reflect the effect of any applicable sales charge or redemption fees. This above data does not imply any future performance. One cannot invest directly in an index.

As the above illustration shows, in comparison to the portfolio of stocks and bonds, the diversified portfolio reduced risk by a dramatic 38%, which translated to only 2.1 years to break even after the 2008 market decline, while also delivering similar returns.

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