More On The Endowment Style Of Investing

I was flipping through a copy of Alpha Magazine the other day, and there was a great article titled, “Back to Beta”. It profiles a company in London, Frontier Capital Management, that has arrived at many of the same conclusions mentioned here on World Beta. You can goto their site to view a free presentation and download these great PDFs:

The Benefits of Portfolio Diversification

Investing Like the Harvard and Yale Endowment Funds

How Important is Asset Allocation?

Frontier invests in 8 asset classes via low cost indexes and futures (and rebalances yearly):

Global Equities 21%
Emerging Equities 6%
Global Bonds 16%
Emerging Market Bonds 4%
Global Real Estate 11%
Commodities 13%
Hedge Funds 22%
Managed Futures 7%

If you net out the hedge fund exposure (or one could use the foreign listed hedge funds), an individual investor could track their portfolio with the following percentages and ETFs/CEFs:

Global Equities 27%, (IOO, EEW, DGT)
Emerging Equities 8% (EEM, GMM, VWO)
Global Bonds 20% (BND, AGG, lots of CEFs )
Emerging Market Bonds 5% (ESD, EED)
Global Real Estate 14% (IYR, RWX)
Commodities 17% (DBC, GSG, GSP)
Managed Futures 9% (RYMFX)

This allocation is in the same ballpark as our “endowment portfolio” (20% each in US Stocks, Foreign Stocks, Bonds, REITs, and Commodities).

Frontier charges anywhere from 75 bps to 150 bps, and expects to have approximately $300 million in AUM by the end of the year.

Actual indices Frontier tracks:

All indices are total return and currency hedged into USD.
• Global Equities: MSCI World Equities
• Global Bonds: JPMorgan GBI; Citigroup US Corporate Bonds
• Emerging Equities: MSCI Emerging Market Equities
• Emerging Bonds: JP Morgan Emerging Market Bonds
• Real Estate: Dow Jones Wilshire Global Real Estate Securities Index
• Commodities: Dow Jones AIG Commodity Index
• Hedge Funds: HFR fund of funds
• Managed Futures: CISDM Composite

There is a different ‘endowment style’ fund which is titled, aptly, The Endowment Fund. They are managed by Salient Partners and Mark Yusko, former head of the UNC endowment. Yusko took his style of investing to Morgan Creek Capital Management which advises The Endowment Fund, Hatteras Investment Partners, and Tiger Select Fund Management.

There is also an article in the recent Smart Money mag titled, “A League of Their Own” profiling the Harvard and Yale endowments that is worth checking out. Also coming out this X-mas is a book that has interviews with twelve top endowment CIO’s .