Diversification is Back
Ask a CIO #41
We started building Ivy Invest two years ago with, at the time, a very non-consensus opinion. We felt strongly that bringing alternative investments to everyday investors would require a total portfolio approach: a single investment point for a multi-asset class, multi-manager portfolio, including traditional and alternative investments.
Or, as a friend helpfully called it – endowment in a box.
Two years ago, marketplaces offering a panoply of individual investment choices were overwhelmingly the favored model. It’s been the preferred model for offering investment options to advisors in the wealth channel. It’s been the primary model for other fintech companies seeking to democratize investments for retail investors.
In recent weeks and months, we’ve seen a significant shift toward our viewpoint. In March, CAIS and iCapital, two of the large alternative investment platforms for financial advisors, announced model portfolio solutions.12 These solutions effectively provide advisors with single decision point investments for multi-asset and multi-manager portfolios. Most recently, Blackstone, Wellington, and Vanguard announced a partnership to develop all-in-one portfolios of public and private assets.3
Detouring for a minute, and then I promise to bring it all back.
As I’m sure everyone has noticed, over the past several weeks we’ve seen rapid and rapidly shifting policy pronouncements. Expectations for a potential economic recession seem to change by the day, and markets have reacted accordingly. Given the ongoing lack of clarity in tariff policy and eventual consequences, it seems reasonable to think that capital market volatility might be around for a while longer.
And, unsettling as the moment might be, these are the periods in which endowment and foundation portfolios can shine. Institutional portfolios – broadly diversified across asset classes, strategies, and managers – are designed to be resilient in difficult markets.
Are they perfect? Of course not. Given the uncertainty, private equity M&A activity (and by extension exits and distributions) continues to lag4. Layer in declining public market portfolios, and many LPs are again dealing with that dreaded term, the denominator effect.5 While the dynamic may present real liquidity challenges for some LPs, for many, it’s manageable through slowing down new private investments. Which is likely both unsurprising and frustrating for GPs.
Potential pacing challenges aside, my sense from conversations with endowment and foundation LPs is that most feel well-positioned.6 Their multi-asset class, multi-manager portfolios include a range of risk and return profiles. Some managers and some strategies may be defensively anticipating a challenging environment ahead. Others are preparing to offensively capitalize on future opportunities presented by ongoing dislocations.
That’s a large part of the value proposition for endowment and foundation portfolios – protect capital (though not fully) in down markets and participate (though not fully) in up markets. Over a cycle, institutional portfolio returns should compare favorably7 against public market returns and do so with a lower volatility profile.
For the past two calendar years, however, the S&P 500 delivered annualized returns of 25.6%.8 Endowment portfolios, broadly speaking, did not keep pace. As endowment portfolios lagged behind public markets, the endowment approach was increasingly called into question.
So far this year, there has been decidedly less criticism. The recent market turmoil is reminding investors of the value of diversification.
Bringing it back, as promised – against this backdrop of heightened volatility, public and private asset managers are making well-timed announcements for their upcoming collaborations. They’re messaging the appeal of a multi-asset class portfolio of traditional and alternative investments. And yet, it’s unclear both when these multi-asset products will actually come to market and what group of investors will ultimately have access to said products.
But that’s ok – we’re already doing it.
Thanks for joining me this week, and as always, feel free to reach out: askacio@ivyinvest.co!
See you in two weeks,
Wendy
Even so, as many endowment LPs might say – private market illiquidity is a feature, not a bug.
Adding a large caveat here – the go forward uncertainty around tax treatment of endowments and possibly foundations. There is an uncomfortably wide set of potential outcomes, some of which endowments and foundations are already preparing for from a portfolio positioning standpoint.
Source: Bloomberg