New York (HedgeCo.net) There is a new generation of investors operating in the market these days and this new generation isn’t afraid to try new or different things. They are increasingly using robo-advisers, liquid alternatives, smart or strategic beta funds and they are more willing to embrace alternative investments.
There are a number of reasons for their comfort level with non-traditional investment tools. First, this new generation of investors is more comfortable with technology than the generation before them and the next generation after this one will be even more comfortable using technology to make investment decisions. Secondly, many of this new generation of investors got started investing in the late 90s or early 2000s and as a result they have already dealt with two nasty bear markets that saw the traditional portfolio structure get decimated. Yet another reason is that this generation has more information at their disposal than the previous generation of investors.
In the past few weeks there have been several reports out about how investors are flocking to these new tools. Investment News featured a story on robo-advisors and it quoted data from a Corporate Insight study that showed the AUM held by automated investment platforms increased by 57% from December 2014 through July 2o15.
The article also featured a quote from Joe Zeimer, a spokesperson at Betterment. “During the recent volatility, we experienced a higher number of new customer sign-ups than usual,” said Ziemer. Betterment has seen its AUM go from $1.1 billion in January, $2.7 billion now.
Additional evidence of how non-traditional investment tools are gaining in popularity came from a report from Morningstar and it showed that the assets invested in smart beta or strategic beta funds grew from $396 billion to $497 billion in the last year. “The strategic beta landscape is growing faster than both the broader exchange-traded products market as well as the global asset management industry, driven by new inflows, new product launches and the entrance of new providers during the past year,” said Ben Johnson, Morningstar’s director of global ETF research. The report cited growth in usage from investment advisors as one of the items fueling the growth, stating that 68% of advisors that use ETFs products are integrating smart beta products in the portfolio construction of clients.
While HedgeCoVest isn’t a robo-advisor or a liquid alternative, we are kind of a hybrid between the two. Yes the platform is automated like a robo-advisor, however the investment decisions are made by portfolio managers. The models offer alternative investment ideologies that can protect investors in a falling market.
A recent story from Kiplinger entitled “Alternative Investments Offer Stability in a Rocky Market” looked at the performance of liquid alternatives during the recent market pullback. According to the article, when the S&P fell 11% from August 10 t0 August 25, the average market-neutral mutual fund lost just 1.2%. The Kiplinger article posed the question of how much of a portfolio should be devoted to alternative investments and the answer they provided came from Chris Geczy, an adjunct professor of finance at the University of Pennsylvania’s Wharton School. Geczy suggested 10% adding that “you may not make as much during a bull market in stocks, but you won’t see the same declines, either.”
Interestingly, the Ivy League schools and their endowments have long been admired for their long-term portfolio returns. One of the things that has set them apart over the years was the ability to avoid the big losses in years when the market was down. In his book, The Ivy Portfolio, Mebane Faber looked at the endowments for both Harvard and Yale and he provided the year by year returns for each portfolio from 1985 through 2008 and he uses their fiscal year over year which ends on June 30. Over that 24-year period, the Harvard Endowment lost money in two years, 2001 and 2002 when it lost 2.7% and 0.5%. The Yale Endowment lost money in 1988 and that was it. The loss that year was 0.2% while the S&P lost 6.91%.
In 2001 when the Harvard Endowment lost 2.7%, the Yale Endowment gained 9.2%. The S&P 500 lost 14.83% that year. In 2002, the S&P lost 17.99% and as was mentioned earlier the Harvard Endowment lost 0.5%. The Yale Endowment managed a small gain of 0.7% that year. In 2008, when the S&P lost 13.12%, the Harvard Endowment was up 8.6% and the Yale Endowment was up 4.5%.
How do these two portfolios manage to make money even when the market is down? One of the reasons is diversification and the fact that they both use alternative investments in their portfolio construction.
A recent Bloomberg article focused on the Yale Endowment and David Swenson. Swenson is the man responsible for running the Yale Endowment and he has been since 1985. “The success of the Yale investment strategy led to a transformation of almost every large college portfolio over the past two decades, from a simple mix of stocks and bonds to heavy weightings of alternative investments.”
With the success Swenson has had, there are a number of his protégés that are now managing the endowments at other universities. The Bloomberg article mentioned these protégés and how their portfolios have performed this year. The article focused on Princeton University’s Andrew Golden, Massachusetts Institute of Technology’s Seth Alexander and Bowdoin College’s Paula Volent, all of whom worked at Yale under Swenson.
According to the article, Volent’s portfolio was up 14.4%, Alexander’s portfolio was up 11.5% and Golden’s was up 12.7%. These figures are measured using the same fiscal year-end numbers that we used above. The S&P was up 5.25% during the same time period. The Bloomberg article goes on to quote hedge fund icon Stanly Druckenmiller who has served on the investment committee at Bowdoin for years. His comments were that they had stakes in the “right private equity managers and I mean the right ones that bore fruit,” and he stated that the hedge fund portfolio “was outstanding primarily because some macro managers had outsize, outlier returns taking advantage of the decline in oil and currencies.”
Rick Pendergraft
Research Analyst
HedgeCoVest
