Adding Alternatives to an Investment Portfolio – Part 3; Investing Like an Endowment Fund

Part 3 of a series of articles about adding / increasing Alternatives in a Portfolio.

The attached article is a recently published article via the CAIA: Investing Like the Harvard and Yale Endowment Funds.

My previous Posts have outlined the potential benefits of adding Alternatives to a portfolio. This article provides some evidence of the benefits of adding alternatives to a portfolio.

The Endowment Fund success has come from having more than just absolute return funds i.e. hedge fund alternative strategies, but also exposure to real assets have played a part, including a Private Equity exposure. Many Australian Super Funds have benefited from their exposure to unlisted infrastructure and Property.

New Zealand Portfolios generally lack exposure to real assets, private equity, absolute return funds, and alternative strategies.

The Top performing Endowment Funds have benefited from “true diversification”, they have benefited from their allocation to alternative asset classes.

“Their long term investment strategy has prevailed to the extent that long term total and risk adjusted returns remain superior to those of traditional portfolios.”


CAIA Investing like an endowment


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Adding Alternatives to an Investment Portfolio – Part 2

Following on from an earlier post on adding alternatives to a portfolio the attached document is a short and precise commentary on the case for adding alternatives to a traditional portfolio.  See link below.

The Title: “It’s an evolution, not a revolution” sums it up very well.

The article notes that the evolution in portfolio construction has moved away from the old way of style boxes, market expectations, and benchmarks, to a greater focus on the investors (clients) liabilities, risk tolerances, and an investors actual objectives – most likely funding requirements in retirement.

The article references the behavioural finance that people “feel the pain of losses far more they do the benefits of gains”. As they say, Investors want to minimise loses, and focus on outcomes rather than returns.

The article is then nicely concluded referencing one of Warren Buffet’s key influences, Benjamin Graham, quote “the essence of investment management is the management of risks, not the management of returns.”  This is so true.

I agree with their concluding remark, “better to lose less and compound more than to reach for excess returns and fail to reach your objectives”. Alternative strategies can play an important role in compounding returns / wealth over time.

P.S. This article is an editorial that appeared in the Chief Investment Officer magazine.

Evolution not revolution


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More on Liability Driven Investing (LDI) for beginners

Developing on the themes of early blogs, Industrial Revolution in Money Management and Liability Driven Investing for Beginners.

This article builds on both of these themes. Particularly the article observes:

“Hence recent focus on liability-driven investment (LDI) strategies, otherwise known as asset-liability management (ALM). More complete and holistic than MPT, LDI explicitly includes an investor’s current and future liabilities.”

MPT = Modern Portfolio Theory, which is the traditional way of building portfolios, focussed more on risk tolerance and return expectations, than investment goals.

The inference is that investors should be focusing more on goals e.g. retirement spending, children’s education, and inheritance, which can be seen as future liabilities that need to be met.

The article notes:

“Nevertheless, there is a growing consensus in the wholesale capital markets that LDI creates better portfolios, particularly when it comes to retirement needs.”

This will likely be in the form of more advanced Goal Orientated Investment solutions for investors. A more robust portfolio will be obtained, one that focuses on the key risks of meeting Investment Objectives.

Obviously most financial planning processes take into consideration investment goals. Nevertheless, LDI makes investment goals the central piece. With LDI portfolio allocation and management of risks is relative to meeting goals and a more customised investment solution is developed.

Under the LDI model there are two portfolios: the liability portfolio and a return seeking portfolio. Most investment products offered today are return seeking portfolios with some dampening down of risk (measured by volatility i.e. how frequently and the degree to which the portfolio goes up and down) so as to fit ones level of risk tolerance.


Lastly, they note:

“The popular MPT framework of expected value optimization given a risk constraint is ripe for disruption. Digital asset management or robo-advice can help distribute LDI technology to the mass market, and we can expect the industry to move in this direction.”

This is consistent with the EDHEC Insights article in the JOIM (EDHEC-Whitepaper-JOIM)– Mass Customization versus Mass Production – How an industrial revolution is about to take place in Money Management and why it involves a shift from Investment Produces to Investment Solutions (Lionel Martellini)


The digital element is likely to be the revolution, LDI type strategies the evolution. Perhaps this is the Uber moment, or AirBnB moment, for the Funds Management Industry. Certainly not the Uber moment of the Funds Management is the offering of cheaper multi-asset class investment products that cannot be differentiated from any other like for like investment products in the market.


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My heroes and a bit about New Zealand

Dick Quax was a hero of mine when growing up. I wish him all the best.

Quax, (John) Walker, and (Rod) Dixon were amongst my boyhood heroes. The book, Kiwis Can Fly, is a great read of the courage, focus, and drive these guys had. (For off-shore readers, a Kiwi is a flightless New Zealand bird and a national symbol. People from New Zealand are affectionately called Kiwis. The New Zealand dollar is also referred to as the Kiwi.)

Of course Quax, Walker, and Dixon stood on the shoulders of giants, Peter Snell and Jack Lovelock, continuing New Zealand’s great middle and longer distance running tradition.

Special mentioned should be made of Arthur Lydiard, revolutionary coach and mentor. Where ever he went in the world athletic success soon followed.


Arthur, influenced a great person who had a big impact on my life who I wish to pay tribute to, Alistair McMurran, who sadly passed away recently. 


Liability Driven Investing (LDI) for Beginners

As outlined in my first blog liability-driven investing (LDI) will play a critical role in the future as investment approaches continues to evolve.

The expectations are that LDI will increasingly be used for individual investors in the emergence of goal-based investment solutions.

LDI is widely used by institutional investors, such as insurance companies, Pension providers, and Endowments.

The attached document provides a definition and explanation for Asset/Liability Matching investing, which is essentially LDI.


I hope you find it useful.


Asset Liability Matching for Beginners


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Robust Investment Portfolios

Happy New Year

As the New Year begins, a year that is likely to be a bit tougher than the last, it is good to reflect that the right investment focus is being maintained.

Most of the discussion within the Investment Industry is on the inconsequential and often to short term in focus.

I have had the honour of managing and determining the investment strategy for a large Australasian insurer.

There is lot to learn from managing insurance portfolios, not the least focusing on the right investment goals, understanding risks and the level of tolerance for risk, appropriately benchmarking what success looks like, and taking a longer term perspective.

These issues are well articulated in this article.

Build robust investment portfolios. As Warren Buffet has said: “Predicting rain doesn’t count. Building arks does.”

Therefore, make sure your investment portfolio is an all-weather portfolio and the ongoing debate and focus is always on the consequential.


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Advancements in Portfolio Management

Hi. This is my first post.

Welcome to Kiwi Investor blog.

The attached article provides insights into the current and likely future direction of the Global Funds Management industry. I have a lot of time for the EDHEC Risk Institute.

This will appeal to those within the industry and those interested in ensuring their investments are being well managed.

None of it is of course investment advice. I’ll add material over time with the view that we can all build better portfolios that address our key investment risk: the failure to meet our investment objectives.



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