Why Direct Investments?


While many investors (and their advisors) still think about investment portfolios in terms of cash, stocks and bonds, a growing number of investors and advisors have expanded their investment universe to include non-traditional investments, often called “alternatives.” The primary benefit of using non-traditional investments in a portfolio is to augment the risk-adjusted returns provided by a common stock-bond portfolio. This strategy is commonly referred to as taking an “endowment approach” because the endowments of large universities were early adopters of non-traditional investments.

As an example, as of June 30, 2015, Harvard University’s Endowment was valued at $37.6 billion, making it the single largest university endowment. The table below outlines Harvard’s asset allocation shifts over the years [1].

As can be seen, the percentage allocation to non-traditional investments increased from 25% in 1995 to almost 57% by 2014.

Harvard University Endowment’s annualized performance over the last 10- and 20-year periods ending June 30, 2015 was 7.6% and 11.8% respectively, as compared to a standard 60% stock / 40% bond portfolio (using the S&P 500 Index and the Barclays Aggregate Bond Index), which provided 6.8% and 7.9% average annualized returns over those same time periods [2].

[1] Source: Harvard Management Company Annual Report 2015.

[2] Source: Harvard 2014 Annual Report.


When performing back-testing analysis, a traditional 60/40 stock-bond portfolio declined 30.8% from peak-to-trough over the period January 2000 to December 2012. Conversely, a portfolio with equal allocations to the S&P 500 Index, the Barclays Aggregate Bond Index, and the Dow Jones Credit Suisse Hedge Fund Index only lost 23.2% during the same period. Moreover, the annualized volatility of the “endowment” portfolio was 6.5% as compared to the 60/40 portfolio at 9.2% [3].

JP Morgan Asset Management performed its own back-testing analysis comparing the return and volatility of portfolios with different allocations. As the chart below highlights, in every scenario, adding an allocation to non-traditional investments improved the portfolio’s return while reducing the average volatility [4].

[3] Data Source: Morningstar

[4] Source: Barclays, Burgiss, Cambridge Associates. FactSet, HFR, NCREIF, Standard & Poor’s, Towers Watson, JP Morgan Asset Management. The portfolios that do not contain alternatives are a mix of S&P 500 and the Barclays US Aggregate, in the amounts highlighted in the chart. The 20% allocation to alternatives shown in the other portfolios reflects the following: 10% in hedge funds, 5% in private equity and 5% in real estate. The volatility and returns are based on data from 1Q90-4Q14.


Bain Wealth Management Group’s overarching investment philosophy is very similar to the asset allocation methodologies pursued by major universities like Yale and Harvard because it offers the potential for superior risk-adjusted returns and lower volatility through all market cycles. This investment philosophy expands the number of asset classes and strategies used to create a portfolio by including alternative investments such as hedge funds, private equity and real estate assets in addition to traditional stocks and bonds in a global framework.

A key advantage of taking an endowment approach to investing is that assets within a portfolio will generally have very low correlation to each other. By investing in non-traditional asset classes, such as real estate, commodities and private equity, endowments were able to perform well even when the markets suffered periods of tremendous volatility and consistent negative returns. Alternatives’ low correlation to the markets provided a hedge against huge portfolio dropdowns during the financial crisis.

Although there are no guarantees that an endowment-style portfolio will outperform the S&P 500 or other equity-based benchmarks in the short-term, an analysis of the returns of the largest endowments shows that, on average, portfolios that follow the endowment approach tend to generate higher returns with lower volatility in the long run.