Investing in form similar to that of large pension plans or college endowments was long a style reserved for the highest levels of investment professionals.
However, that style is now available to a broader audience thanks in large part to WisdomTree’s suite of endowment model portfolios.
“These strategies are designed for investors who seek to incorporate real assets and alternative investments into a traditional portfolio of U.S. and international equity and fixed income ETFs,” according to the issuer.
Like other market participants, endowments are active in traditional asset classes such as stocks and bonds. Where emulating endowment becomes tricky for individual investors is on the alternatives front. Yes, that includes commodities, which are readily attainable for any investor, but endowments dive deeper into the alternatives universe, often embracing long-short strategies and hedging techniques. That jibes with the long-term (into perpetuity) time frame of endowment and their efforts to reduce portfolio risk.
“The primary investment objective of university endowment funds is to generate sufficient returns to maintain the purchasing power of their assets in perpetuity and sustain the university’s operating budget. In general, endowments target a real average annual return of 5% (adjusted for inflation) over the long term (five to 10 years),” according to Pictet Wealth Management.
The WisdomTree model portfolio solves the alternatives riddle in a variety of ways. There’s the the broad-based WisdomTree Enhanced Commodity Strategy Fund (GCC), which is a straight-forward inflation-fighting tool, while the the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW) and the First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) elevate the model portfolio’s income profile.
Within the aggressive sleeve of this model portfolio, there’s a 30% allocation to alternatives, which meshes with the long-declining role of public equities in university endowments.
“Large US endowment funds’ allocation to public equities declined from 45% of total assets in 2002 to 30% in 2020 (having fallen to as low as 26% in 2009), while their allocation to alternative assets increased from 32% to 59% over the same period,” adds Pictet. “In 2020, the Yale endowment fund, the third largest in the US, said it aimed to have around three quarters of its assets allocated to alternative assets.”
Another interesting point about the WisdomTree model portfolio’s aggressive sleeve is that its alternatives allocation more closely resembles that of a large endowment. As Pictet notes, many smaller endowments tend to focus on more traditional assets, such as domestic and foreign equities and investment-grade bonds.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.