Follow Swensen's Yale Endowment Fund

David Swensen has gained great fame in the last few years as the head of the Yale Endowment Fund (you can click here for more about the fund's performance).

As the exchange-traded vehicle industry has evolved over the last few years, it has become easier to emulate the fund.

Here's how it's possible to use things like ETFs and mutual funds to create your own endowment.

Click here for larger image.
(Source: Bespoke Investment Group)

The basic goal behind this sort of mix is strong returns, low volatility and a low correlation to the U.S. stock market. It's easy to see how the right people implementing a portfolio with these tools could accomplish that goal.

Obviously domestic equities, foreign equities, fixed income and cash are all readily available.

Absolute Return

There have been many products added to the absolute return in the last few years. Some that I think are worth exploring;

  • Rydex Managed Futures Strategy (RYMFX), which I wrote about here and here.

  • Permanent Portfolio (PRPFX)

There are also countless mutual funds that use long/short strategies. Some of these funds struggled badly last summer, just as the market's volatility was ramping up. A couple that did relatively well were:

  • JP Morgan Multi Cap Market Neutral Fund (OGNIX); don't let the 48-cent dividend in December throw you.
  • Merger Fund (MERFX), which I blogged about here.

One last idea to mention for absolute return would be creating your own pairs trade involving sector ETFs, which I wrote about in detail here and here.

Private Equity

Private equity is tricky. There are plenty of exchange-traded vehicles, but just about every one that I found is down a lot more than the market. Most of them have very high yields, but they had high yields before they fell that didn't protect them.

I wrote about MVC Capital on Jan. 1 and while many names in the space like Apollo Investment Group ( AINV), KKR Financial ( KFN) and the PowerShares Listed Private Equity Portfolio ETF ( PSP) have been down 25% or more over the last year, MVC is only down 10%.

That may not be much consolation, and figuring out when this group turns around could be very difficult to do.

Real Assets

"Real assets" takes in a lot of different things that are easily accessed and not that difficult, relatively speaking, to understand.

The first thing that comes to mind is probably commodities. There is no shortage of precious metals, industrial metals, grains and other soft commodities to choose from in ETF or ETN form.

Real assets are intended to protect against inflation, so a part of this segment would also be inflation protected securities. Some of the more well-known products include the

  • iShares Lehman TIPS Bond Fund (TIP)

  • Vanguard Inflation Protected Securities Fund (VIPSX)

  • StateStreet SPDR DB International Inflation Protected Bond ETF (WIP); this one is very new.

I think the real-asset segment offers the most potential for innovative new products.

One example is the Macquarie Pastoral Fund, which invests in cattle and land -- mostly in Australia. It doesn't trade on an exchange, but is available to U.S. investors. The fund is only a year old, and if it does well, there will be other products isolating disparate investment niches. That will create more opportunity for do-it-yourselfers to create their own endowment fund.

Is this something that do-it-yourselfers, or for that matter professionals, should even attempt?

The short answer is -- not exactly.

A friend of mine likes to say that none of us are David Swensen, and none of us have access to his Rolodex.

Still, everyday folks can access market segments that they previously could not, and the exchange-traded versions of these segments will improve over time.

That will give us the ability to construct more-sophisticated, and hopefully better risk-adjusted, portfolios by adding in a few of these sorts of things.

I believe the approach that makes the most sense is to add in one or two items from real assets and absolute return as diversifiers for an equity-based portfolio -- as opposed to Yale, which appears (albeit very successfully) to use equities to diversify a global macro hedge fund.

At the time of publication, Nusbaum was long TIP, WIP, MVC and RYMFX in client and/or personal holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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