Alaska's Fund Diversifies -- So Should You

It appears as though the fund has no plan in place for defensive action in case the equity market deteriorates. Indeed, I entered several search queries about defense or exit strategies in the 2008 annual report but received no results. The nature of endowment investing makes it very difficult to raise cash and sit on the sidelines. It would be reasonable for a manager hired by an endowment fund to believe he has been given a mandate to remain fully invested.

Where I think do-it-yourselfers can learn is the allocation choices. There are a few important ideas contained within and several that are clearly missing. I think absolute return is becoming an important asset class as normal equity returns remain elusive. Infrastructure would seem to benefit from a coming stimulus package that will involve creating new and improving the country's old electrical grid, bridges and the like.

Missing from the mix are emerging markets, inflation-protected securities (which would seem to be important given the goal of 5% returns after inflation) and commodities.

Commodities may be omitted by design due to the source of the Permanent Fund, but, given how well the space has done this decade -- emerging markets, too, for that matter -- I find it odd that these asset classes aren't specifically targeted. Over the course of the five-year bull market that started at the beginning of the second quarter of 2003, iShares MSCI EAFE Index Fund(EFA Quote) was up 150%, badly lagging the iShares MSCI Emerging Market Index Fund(EEM Quote), which rocketed 350%.

Do-it-yourselfers can learn from the basic asset classes that appear to be missing and also are not restricted from taking a defensive posture based on some sort of exit strategy, such as when the broad market going below its 200-day moving average (or DMA) or the 50 DMA crossing below the 200 DMA or any other strategy with a track record for success.