Page 34 - DIY Investor Magazine | Issue 30

60/40 AND OTHER DINOSAURS
A simple practical step to take your portfolio from the 1990s into the 2020s...
Over decades, investors’ ideas about how to build the perfect portfolio have evolved. Large pension fund investors typically led innovation, with consultants and smaller pension funds following; then discretionary wealth managers followed by retail investors as trends trickled down.
Markowitz is the architect of modern portfolio theory, which investors have worked with and adapted over time. In the 1970s, with high interest rates available, institutional and pension investors focussed on fixed income.
In the 1980s many turned to domestic equities, and the 60/40 equity and bond split within portfolios became common. The 1990s saw further diversification, and international equity investing became mainstream. This century, institutions have further diversified portfolios, adding alternative asset classes such as private equity, hedge funds, real estate, and illiquid assets.
THROUGH THE LOOKING GLASS
The investment trust sector has in some ways echoed these developments.
‘WE BELIEVE THE INVESTMENT TRUST UNIVERSE REPRESENTS A ‘PREMIER LEAGUE’ FOR INVESTMENT MANAGEMENT TALENT’
In the ‘80s and ‘90s trusts were launched to capitalise on ‘new markets’ such as Europe, Asia and Emerging Markets, with institutions enthusiastic supporters.
Similarly, the booming listed hedge fund sector in the mid- 2000’s came on the back of the experience institutional investors had of Cayman based hedge funds in the late ‘90s and early 2000’s.
Trusts continue to launch, enabling investors to harness hard- to-access asset classes, often illiquid, but offering potential to diversify traditional equity and bond risks.
WILL THE FUTURE CONTINUE TO ECHO THE PAST?
The recent death of David Swenson, a pioneer in evolving institutional portfolios, caused us to examine what the future might be for discretionary wealth manager or retail investor portfolios, assuming the future continues to echo the past. David ran Yale Endowment from 1985 until he died in May 2021 delivering strong and consistent returns.
He revolutionised Yale by applying an extension of Markowitz’s theory. He identified eight asset classes, with weightings determined by risk-adjusted returns and correlations.
A diversified strategic asset allocation was made to the asset classes with regular rebalancing (which some researchers believe contributed 40% of Yale’s excess returns), and a dedicated manager selection team.
LESSONS FROM YALE
So far, so not very different (in theory at least); we believe the key lessons from Swenson and Yale are their very different attitudes to equity risk (high tolerance), and willingness to embrace private markets and illiquidity.
Their ultra-long term/perpetual investment mandate helps embrace risk and illiquidity.
Many private client, JISA or SIPP portfolios also have multi- decade investment horizons but the differences between Yale’s current portfolio and the various ARC Private Client Indices are stark.
Notable in the latest ‘model’ allocations from ARC is the significant cash and fixed income exposures – even for those with the highest risk.
DIY Investor Magazine | Sept 2021 34