BOSTON ( TheStreet) -- Aside from large losses at the height of the recession, university endowments have enjoyed long-standing prosperity and superior returns. Can the average investor take cues from the inner workings of these financial powerhouses?
For years, the answer has been a resounding "no." Mohamed El-Erian, the one-time head of Harvard University's endowment, once quipped that it would be "like advising my son or daughter to drop out of school and play basketball with the goal of becoming the next Michael Jordan."
But the rapid rise of the ETF marketplace and the ever-increasing creativity of specialized mutual funds mean retail investors can now take inspiration from, if not replicate, these institutional strategies.
The modern era of endowment strategy is usually credited to David Swensen.
Swensen headed to
endowment offices in 1985 with a reputation for creativity. At 27, while working for Salomon Brothers, he invented the derivative instrument known as the "swap."
When Swensen arrived, Yale's endowment was locked into a conventional 60/40 split between stocks and bonds, earning an average return of only 6.5% annually. Over time, he would reinvent it as a diverse and complex mix of alternative asset classes, private equity, hedge funds, commodities and real estate. This set the stage for an impressive average return of nearly 12% a year, building its value to more than $16.3 billion. Nearly all university endowments have adopted a similar strategy and moved away from the safe, vanilla allocation models of the past.
Translating that for street-level investors has been viewed as a fool's errand, with many of the alternative asset strategies used by institutional investors either ill-advised or out of reach.
Matthew Tuttle is author of
How Harvard and Yale Beat the Market: What Individual Investors Can Learn From the Investment Strategies of the Most Successful University Endowments
. He said his desire to tackle the topic came after reading Swenson's book,
Unconventional Success: A Fundamental Approach to Personal Investment
, which was promoted as offering his advice for Main Street investors. But between its pages, readers were steered away from considering most endowment strategies.
"I was excited and couldn't wait to read it and see what insights he had," Tuttle says. "But the book basically said, 'You guys can't do what we do here at Yale, so you might as well just buy index funds.' I was disappointed, to say the least."