Household Endowment Model
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Some leading educational endowments were able to outperform markets through various cycles depending on the level of their sophistication. These endowments credit their investment performance to a disciplined and clearly defined approach of allocating to distinct asset classes. These classes include, but are not limited to, public equity, real estate, private equity, fixed income, natural resources and commodities. Notwithstanding their mandates to meet the intermediate and long-term inflation-adjusted spending needs of their respective institutions while simultaneously meeting inflation targets, these endowments were able to outperform broader indices through various market cycles with significantly less volatility.
While the investment landscape has changed, we can learn from the success of super endowments by better understanding what makes them successful. Individual investors have many shared basic goals with endowments—income generation, meeting future liabilities and growth over the long haul, for instance. But, because individual investors are different from university endowments in many ways, we must adjust the endowment methodology to apply to individual households. The Household Endowment Model proposes a similar three-pillar approach.
First, a full or sophisticated diversified portfolio should stand as the core. We simply refer to this as the Steady portion, which allows for diversification to serve as the first line of defense in managing risk.
Second, because markets are fluid we next integrate a tactical element that allows for flexibility to adapt to changing conditions. We refer to this as the Ready portion, which permits the portfolio to tilt to take advantage of themes or to play offense or defense.
Third, we introduce managers who attempt to outperform the market through security selection, market timing, proprietary deal access and other ways to fulfill various asset classes. We call this this Heady portion, which allows for alpha as the managers take advantage of investment dislocations as they arise.