How would you allocate your portfolio if you could start from just a blank whiteboard?
That was the question posed to 28 “next generation” institutional investors and officials from 10 money managers who joined together in May to brainstorm on the future investment model. “The Portfolio Whiteboard Project” was produced by Cathleen Rittereiser, founder of Uncorrelated LLC.
The project was conceived to replicate Yale University Chief Investment Officer David Swensen's process of starting over from scratch to create what is now referred to as the “Endowment Model,” and to look at ways to change it. Ms. Rittereiser said it became abundantly clear that the model needed to focus on more than just asset allocation.
“What we really concluded is the endowment model, if it is defined as the process (and not just asset allocation), has these three components — governance, asset allocation and execution,” Ms. Rittereiser said in a telephone interview.
Ms. Rittereiser said participants believed there are well-established best practices for governance, but that actual implementation is lagging and that plans need to make use of their mission statements and culture to align their investments. On the asset allocation side, there was a large consensus on moving to an objectives-based approach, rather than just using traditional asset classes, and focusing more on a risk framework. The execution comes where objectives are mapped to specific assets with risk premiums that represent a plan's goals and properly explaining that to investment boards and others in charge. A white paper about the project adds it can become more expensive with more risk management and monitoring layers.
Top themes that were cited as critical to investing for the next 20 years included the “Japan syndrome” with low rates and inflation, an aging population and a devalued currency; developing/emerging markets with young population, geopolitical upheaval and a rising middle class; and market structure with banking/regulatory structures, investment crowding and higher risks and complexity.
Two-thirds of the 28 investment officers came from foundations and endowments, with the rest from pension funds and insurance companies. The investment officers also collaborated with officials from 10 money management firms in separate sessions to tackle a new investment model.
“There are not a lot of opportunities for active managers to be involved in this conversation, but they are affected by it,” Ms. Rittereiser said.
The entire paper can be viewed here.