Invest Like Harvard (with the Help of Venovate)

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Barron’s recently interviewed Jane Mendillo, CEO of Harvard Management, which oversees the $32.7 billion Harvard endowment, the largest endowment in the country.

Harvard endowmentAlternative investing stood out as a prominent theme of the discussion. Harvard currently has 11% in U.S. stocks and 55% of the portfolio allocated to alternative investments, including private equity, hedge funds, real estate, and natural resources. It also has 11% in both foreign and emerging market equities and only 11% in fixed income securities. This represents a significant departure from 1995, when it was 70% stock, 22% bonds and only 13% alternatives.

Mendillo explained the advantages of the endowment’s strategy and need for a more sophisticated approach to portfolio construction. According to Morningstar, for the ten years ending 2012, the annualized performance of the U.S. stock market ranked 36 among the world’s top 45 markets, so international and emerging markets must be a larger part of the mix. Alternative investments can even out the higher volatility of these equities with a better return than bonds. This approach is replacing the more traditional portfolio of fixed percentages of stocks and bonds in many institutional portfolios. Over the past 10-year period, through the use of alternative investments, Harvard has beaten the S&P 500 by 2.2% and a 60/40 blend portfolio of stocks and bonds by 3.3% per year on an annualized basis.

Investing in alternatives is not without risk, however. Mendillo discusses how Harvard’s overexposure to illiquid investments hurt the portfolio during the downturn and since has restructured the portfolio to better fit their liquidity needs. They also eliminated  5% of leverage from their portfolio.

Let’s look at some lessons to learn from this, and how Venovate Marketplace can be of help to invest like Harvard.

1. Use alternative investments

Challenge: Most accredited investors have not had access to the alternative investment universe, but can now include these asset classes in their portfolio.

Solution: Venovate Marketplace is building a platform that offers access to private real estate, natural resources, private equity, hedge funds, infrastructure, and direct private company investments.

 2. Apply real diversification

Challenge: Diversification today means more than a simple stock/bond mix. Adding international and emerging market equities can capture higher returns, but increases volatility. Carefully chosen alternative investments can help manage this volatility and offer the opportunity for higher non-correlated returns than bonds.

Solution: The minimum investment size for alternative investments on Venovate Marketplace can be as low as $25,000. This allows accredited investors the opportunity to build a diversified alternative portfolio without overexposure to any one private company, deal, asset class, or even fund.

3. Understand your time horizon

Challenge: Individual investors do not have the indefinite time horizon of an endowment, of course. They must structure their investment strategy and portfolio construction around realistic liquidity needs. Mendillo suggests an “illiquidity premium – of at least 300 basis points annually on average over publicly traded stocks” is needed for tying up your money in any particular investment for multiple years. Particular care must be taken in IRAs and other qualified plans if you are in or near retirement and distributions must begin by age 70½.

Solution: Venovate Marketplace offers investments that fit a variety of liquidity needs – from illiquid venture capital or natural resource funds with multiple year lockups to alternative products with daily liquidity.

4. Do your research

Challenge: Investing in anything can be risky, but alternative assets generally include a larger minimum dollar commitment and a period of illiquidity. It is important that you fully understand what you are investing in, the risks, the opportunity, and the lockup period. These differ widely from one deal to another, so it is important to do your own research or engage a qualified advisor to do it for you.

Solution: Every Venovate Marketplace listed investment opportunity has standardized, transparent information including a private placement memorandum, financials, term sheet, and subscription agreement.

In conclusion, alternative investments are not just for large institutions and endowments anymore. Through Venovate Marketplace, individual accredited investors now have access to a new world of investment opportunities. Sign up for our Beta, and be among the first to experience Venovate Marketplace.