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Using an ETF Portfolio to Mimic an Endowment Portfolio

Real estate is easy to capture in that there are plenty of products to choose from in terms of ETFs and individual issues. The CalPERS real estate portfolio reported a 15.4% gain vs. just 7% for the iShares Cohen & Steers Realty Majors (ICF).

Real estate has been tricky since the start of the financial crisis. REITs got crushed in 2008 and 2009, and ICF fell 72% from its peak. From the low in 2009, ICF is up 194%, but it's still well below where it was five years ago. Exposure now requires making a decision about whether the rally from the last three years was fundamentally based with more to come, or simply a reflex bounce with another down-leg waiting to occur.

Forestland and Infrastructure

Forestland is a standalone category in the performance report. This asset class gained attention many years ago when Jack Meyer, the former CEO of the Harvard Management Co., allocated money to the space due to its low correlation to equities and steady returns.

There are ETFs for this space, including the Guggenheim Timber ETF (CUT), which was down 20% in the last year compared to CalPERS allocation, which declined 11%. Many investors are probably familiar with Plum Creek Timber (PCL), which was only down 2%.

PCL has consistently outperformed CUT since CUT's inception, but that is probably due to CUT's holdings being more cyclical versus PCL, which is more defensive. The economic recovery has been quite weak so it is likely that, in the face of a strong recovery, CUT would outperform PCL.

Infrastructure performed well for CalPERS, returning 8.4%. There are various types of infrastructure ETFs. The PowerShares Emerging Market Infrastructure Portfolio (PXR)has 50% in materials stocks and 47% in industrial stocks and is relatively volatile. The SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)has approximately 80% in utilities stocks and so is less volatile.

A reasonable compromise between the two extremes could be the iShares MSCI Emerging Markets Infrastructure Index Fund (EMIF), which allocates 40% to industrials, 30% to utilities and 27% to energy companies.

Liquidity, Inflation and Absolute Return

CalPERS has a category called liquidity, which can hold cash, cash proxies and government bonds. The return for this category was 4.6%, which seems very high considering cash has zero yield in most currencies. One currency with some yield is the Australian dollar, which can be captured with the CurrencyShares Australian Dollar Trust (FXA) and has a trailing yield of 3.79%.
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