Modern Portfolio theory shows how risk adjusted returns of a porfolio can be improved by diversification across assets with varied correlations.  This is a way of saying, while some assets are increasing in value, others are decreasing or remaining stable. So, Modern Portfolio theory, as practiced by sophisticated investors like large university endowments, have generated superior investment returns for over two decades. In years like 2008, when the markets nearly imploded, these funds suffered much less than other investors.  In up years, they may do somewhat less, but, on balance the results are attractive, to say the least.
 
In the most recent ten year period, the large endowment funds, using Modern Portfolio theory have delivered returns that were double those of traditional portfolios. The difference is not attributable to stock selection, but to broad diversification across asset classes.  So, the question for most of us is, "can we practice Modern Portfolio theory? The answer is yes.  There are investment products available to the average investor that will enable him or her to spread investments across asset classes.
 
What are asset classes? Certainly stocks and bonds. In addition, there are real estate, commodities, hedge funds, and private equity. Stocks and bonds are typically subdivided by factors such as asset size, growth versus value, time duration and domestic versus international. How is an endowment portfolio allocated? Using the so called super endowments as examples, they put 29% of assets in global equities, 9% in global bonds, 12% in emerging market equities, and 1% in emerging market bonds. The remaining categories are global real estate 11%, commodities 17%, hedge funds and private equity make up the remaining 21%.
 
Using mutual funds and unit trusts currently available , the average investor can essentially mirror the portfolio of the large endowment. If this is an appealing exercise, we can help. Contact us at anadolna@associatesgroupinc.com and we will provide the specific products that you can use to construct your own endowment portfolio.