• The major institutions prioritize diversification across assets with mixed correlations to enhance risk-adjusted returns.
• Compared to the top endowment portfolios, the average 401(k) allocates five to ten times more to stocks and bonds.
• Most investors have limited access to illiquid assets and alternative markets—with the exception of private equity real estate.
Large endowment managers, insurance companies, and pension funds invest far beyond the stocks and bonds that make up a traditional 401(k) portfolio. Year over year, these institutions achieve attractive returns with reduced risk thanks to significant diversification into alternative asset classes and private equity opportunities.
Mark, one of our co-founders, had almost his entire portfolio in stocks until about ten years ago. Tired of watching his money move at the whims of the stock market, he started examining what others were doing—namely, the top institutional investors—to see how he could emulate their strategies.
He realized that while individual investors don’t have the same buying power—they can still stand on the shoulders of these giants. So today, we’re going to talk about how you, as an accredited investor, can take a few pages out of the institutional-investor playbook.
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STEP 1: Utilize Their Methods
The fundamentals within this playbook are largely based on modern portfolio theory, developed by Nobel Prize–winning economist Harry Markowitz. He firmly held that diversification across assets with mixed correlations will enhance a portfolio’s risk-adjusted returns.
This theory was championed by David Swensen, who took the Yale Endowment from $1.3 billion to $30 billion (with more than 12% average annual returns) over his nearly 35-year tenure. Other institutions were quick to follow in his footsteps, adopting what is known as “the Yale Model.”
On average, 401(k)s allocate between 60–90% to stocks and 10–40% to bonds. Compared to the top endowment portfolios, the average 401(k) allocates five to ten times more to stocks and bonds. Why? Because the institutional fund managers have much more access to lucrative alternative investments.
In 2021, the Yale Endowment fund plans to invest up to 50% of its dollars into illiquid assets like venture capital, leveraged buyouts, real estate, and natural resources. Real estate accounts for 9.5% of their allocation mix, compared to 2.25% for US stocks and 7.5% for bonds and cash. (Read Yale University’s full annual report here.)
STEP 2: Diversify with Private Equity Real Estate
- Private equity real estate investments account for 10–25% of asset allocation in most endowments; the majority of individual investors aren’t even aware they have this option at their disposal.
- This sector offers opportunities to invest in:
- An individual asset like an apartment building or industrial warehouse
- fund of funds (FOF) where an investor purchases shares of multiple properties through a professionally managed fund.
- In both instances, capital is aggregated from numerous investors in what is known as a syndication, allowing them to participate in stable, cash-flowing investments that would not be accessible otherwise.
STEP 3: Work with the Best in the Business
Generally speaking, the best real estate opportunities have minimum investment requirements that can reach millions of dollars. Very few people have that kind of liquid cash. But by pooling capital from several investors, an FOF can meet these high minimums and invest in incredible deals with top-notch operators who are otherwise out of reach.
Unless you have a solid track record with these operators, it’s virtually impossible to get a foot in their doors. By utilizing an FOF, new investors can access some of the best operators in the industry since many FOF managers have already put years of work into establishing those relationships.
In an FOF, investors are backed by a fund manager with ample experience, a trusted network, and priceless resources for selecting and managing a strong portfolio of real estate assets. A fund manager can conduct due diligence, provide expertise, and oversee the investments that an independent investor may not be able to accomplish.
The vast majority of large institutions, pension funds, and endowments have portfolios with investments across stocks, bonds, real estate, private equity, hedge funds, commodities, and more. Most investors cannot diversify exactly like the professionals, but private equity real estate is the best way to have some of what they’re having.
If you’re an accredited investor, why not invest like the best? At Cira Capital Group, we help busy professionals diversify their traditional investment portfolios by creating private real estate funds, pooling investors’ capital with our own, and investing with world-class operators.
At Cira Capital Group, we help busy professionals protect their traditional investment portfolios against inflation by creating private real estate funds, pooling investors’ capital with our own, and investing with world-class operators.