endowment style investing

In a cooperation with Business Insider Magazine (“Learning from the super-rich”), BeeWyzer is contributing articles and webinars since January 2025 in order to share lessons from managing big wealth with a broader public. In the end, an increase in wealth and investable assets is a driver of economic growth and beneficial for everybody. We are happy to share the articles in our blog also – feel free to skip if you are an expert already and enjoy the read if they offer valuable knowledge to you!

Endowment Style Investing

Why the super-rich and endowment funds are spreading their assets more broadly than just in equities and bonds: Alternative asset classes and their integration into long-term strategies

By Christian Stadermann and Peter Brock, BeeWyzer GmbH

Conspiracy theories lurk everywhere, including in the investment world. What the super-rich and large masses of wealth do is closed to normal investors - they will always 'get the short end of the stick', is one of them. But is this really true? It's worth looking into the details here.

Of course, normal private investors cannot make direct investments in unlisted companies because these are only accessible to very large fortunes. Nor do they have access to all information channels. In this respect, their options are indeed limited.

But when it comes to access to alternative asset classes, this limitation no longer applies without restriction:

Private equity including venture capital, hedge funds and other alternative investments have long been accessible in small denominations. Securitization and fintech platforms have made it possible to invest in smaller lot sizes at acceptable costs. This also applies to large flagship funds, which were previously not investable for less than EUR 1 million or more. Although individual vehicles are still held exclusively, access to asset classes has been created and is constantly being expanded.

But what is endowment style investment and why should you invest in it?

The best-known representative of this approach was David Swensen, who successfully managed Yale University's endowment fund for a long time. From 1999 to 2009, he was able to achieve double-digit annual returns with a manageable level of risk, which is an extraordinarily high value for an endowment fund. The basis for this success was the expansion of modern portfolio theory to include alternative asset classes, including investments in forests, for example. This has enabled a greater diversification of assets and better positioning in terms of return potential per unit of risk. The price for the 'endowment model' is illiquidity: most alternative asset classes mean long-term capital commitment, usually 10 years or more for traditional buy-out funds in the private equity sector. But they usually offer long-term out-performance compared to traditional asset classes.

What does this mean for private investors?

Anyone who invests in shares should do so with a long-term investment horizon, but can still sell on each trading day. If you miss out on a bonus but still want to buy a new car, you can fall back and liquidate your portfolio. This is not possible with alternative investments, or only at high cost, similar to the early termination of a life insurance policy.

Whether you can use the endowment model for yourself can therefore only be determined through strategic financial planning and consistent asset allocation. At the beginning there should be a private balance sheet with all receivables (assets) and liabilities (open and hidden debts). This should be followed by an income and expenditure cashflow statement in order to gain a better overview of specific household management now and in future planning. If the financial leeway then allows you to 'put away' some of the assets permanently for private pension provision, this is the framework that comes into question for 'alternatives'.

Now comes the detailed work: the ratio of liquid to illiquid investments must be determined, the allocation of the two different investment categories and vehicles should be roughly planned, risk factors across the entire portfolio should be assessed and adjusted if necessary. This is where some financial mathematics comes into play, which not everyone likes or is able to do. But it doesn't have to be difficult: Many things can be clarified with free or inexpensive software or you can pay a qualified financial advisor (e.g. Financial Planner) once to create such an overall view, a 'Strategic Asset Allocation'. This can be an independent advisor or a specialist at a bank, an asset manager or a multi-family office.

Private investors often shy away from such expenses as they reduce returns. But when buying a house or trading in a car, a paid appraiser is often used.

As there is at least as much risk involved in organizing assets, you should not be petty and think in the short term. When selecting such service providers, however, it is important to be thorough, as the range of quality can be wide and it is often difficult for non-experts to make an assessment.

Let us summarise the essentials for endowment investments:

- Financial planning and creating a strategic asset allocation are the start of everything

- Broad diversification across many - even illiquid - asset classes improves the return potential per unit of risk

- We receive the so-called 'illiquidity premium' at the price of severely limited capital availability

- In illiquid asset classes, the difference in performance between the best and worst managers is many times greater than in liquid asset classes

- You should therefore not shy away from the costs of tools and/or good advice, but be careful when making your choice

- The endowment investment approach also increases the robustness of your overall portfolio, as the individual risks of specific investments or investment categories are cushioned across a broader portfolio. (We cover this risk overview even more broadly in the 'BeeWyzer Robustness Indicator', which can be downloaded free of charge from www.beewyzer.com).

The endowment model has proven its superiority over long periods of time and therefore also makes sense for private investors with a suitable planning horizon - e.g. for private pension provision. The changed market structures of the financial industry now make it possible to implement the model in a cost-effective and qualitatively satisfactory manner. However, if only few private investors still do it, this is probably due to mental barriers, a lack of knowledge or advisors who do not take the approach into account. It is time to change this and increasingly implement the investment principles of the 'super-rich' for normal private investors.