University endowments and large foundations use a different investment approach compared to most individual investors. This approach has generally generated better returns versus traditional stock/bond portfolios; for example, from 2014-2024, an endowment-style portfolio returned 11.0% annualized vs. a typical 70/30 portfolio that returned 6.7%¹. At Ivy Invest, we've taken this endowment style of investing and made it available to everyone.

Our endowment-style investment approach leans into two strategic insights from our CIO's years of institutional investment experience. First, asset allocation and portfolio construction are the most important decisions in the investment process. Second, every asset class and investment strategy requires a distinct skill set, and it's important to invest with skilled managers.

We know that the endowment-style framework is less familiar to most individual investors. In contrast to institutional investors, individual investors often don’t prioritize asset allocation and portfolio construction. This gap is totally understandable, as individual investors generally have a small menu of options to choose from (typically some combination of mutual funds, ETFs, stocks, and bonds), in which many of the menu items look and feel remarkably similar. Institutional investors, on the other hand, have an enormous array of investment options. A clear asset allocation and investment framework enables institutional investors to efficiently and effectively sift through and evaluate opportunities. More importantly, these decisions inform how much and what type of risk is taken in the portfolio, and consequently, the portfolio’s return potential.

We break the investment universe down into a few broad categories based upon their risk/return attributes and roles in the portfolio: equities, income, and diversifiers. Within each asset class, the Fund invests in experienced institutional asset managers, selected through a rigorous due diligence process.

Equity investments offer the highest potential returns but also carry the most risk. Equity represents ownership in a company (publicly traded or privately held) and captures both gains and losses in value.

Equity investments offer the highest (i.e., uncapped) return potential, and over market cycles, we can expect equities (public and private) to outperform other asset classes. Conversely, equity investments are also the highest risk, as measured by historical volatility and risk of drawdown/potential capital loss. Taken together, we believe equities should be the largest allocation within a more broadly diversified portfolio.

From a capital structure perspective, equities are the most junior securities, and the equity value of a company reflects its residual value after accounting for all liabilities (e.g., operating expenses, taxes, debt, etc.). Equities therefore capture all the “upside” in company value growth and suffer all the “downside” when a company’s value contracts. Public equities (stocks) reflect this residual ownership claim on publicly traded companies, and private equity reflects the residual ownership claim on privately held companies. Given the conceptual similarities, we generally evaluate total equity exposure in the aggregate across public and private equity.

Income investments generate returns primarily through current income/yield. The current income component can provide a measure of downside risk mitigation, and investment risk can be further reduced through capital structure seniority and strong underwriting standards (i.e., income investments should have minimal risk of capital impairment). Income investments can include bonds, treasuries, and certain types of private credit investments, including corporate senior direct lending and asset-based lending.

Diversifier investments generally meet two criteria: 1) the ability to generate equity-like returns; and 2) low beta and/or correlation to equities. Diversifier investments are likely to vary over time, depending on the opportunities available across public and private markets.

Certain types of investments, such as real assets, have an easier time satisfying the second condition (low beta/correlation), but don’t always offer the opportunity to meet the first condition (equity-like returns). These investments can still have value within the Fund's portfolio due to their diversification benefits, but the allocation will tend to be lower given the lower expected returns.

Other types of investments, such as hedge funds, have certain examples that consistently meet both conditions but may be subject to challenging fees and fund terms. Consequently, hedge funds will also tend to have a lower allocation within the Fund's portfolio.

Special situations, distressed/liquidations, and other process-driven or dislocation-driven investments can be compelling diversifier investments. However, these investments are highly opportunistic in nature and can be plentiful or scarce, depending on the market environment. The Fund's portfolio allocation to these types of investments is likely to vary over time.

¹ 10-year annualized returns as of 3/31/2024. Endowment-style portfolio is represented by an allocation of 20% private equity, 15% private credit, 5% real estate, 45% S&P 500, and 15% Bloomberg Global Aggregate Bond Index. Traditional stock/bond portfolio is represented by an allocation of 70% MSCI ACWI Index and 30% Bloomberg Global Aggregate Bond Index. Private equity returns are represented by the Cambridge Associates LLC US Private Equity Index. Real estate returns are represented by the Cambridge Associates LLC Real Estate Index. Private credit returns are represented by the Cliffwater Direct Lending Index.

 For illustrative purposes only. The inclusion of various indices is for comparison purposes only. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Past performance is no guarantee of future results.