Portfolio Construction Using Endowment Drivers with David Armstrong

Strategic Investor Radio Charley WrightDavid Armstrong, portfolio manager for Cedar Capital, was Strategic Investor Radio’s very first guest when the program debuted in October 2014. In this episode, Mr. Armstrong is back with host Charley Wright, as the two men discuss Cedar Capital’s “unique and innovative investment strategies” and approach to portfolio construction.

Cedar Capital works exclusively with investment advisors who then maintain a personal relationship with clients. The firm’s Market Advantage Portfolios (“MAPs”) are held within separately managed accounts (“SMAs”) or investors can hold assets directly by copying Cedar Capital’s allocation weights. Those weights are based on models used by endowments and foundations, and generally break down to equal parts private equity (“PE”), absolute-return strategies, and commodity and real estate exposure. MAPs achieves or emulates those exposures through ETFs and mutual funds.

Dave Armstrong Alternative Investments
David Armstrong, Portfolio Manager at Cedar Capital

As endowment and foundation portfolio construction has evolved over time, so have the MAPs strategies. Decades ago, endowments and foundations had what Mr. Armstrong calls a “strategic allocation” to equities and fixed income – some variant of the tired “60/40” or “70/30” approach. But over time, they’ve increasingly tilted toward an “alternative allocation,” with as much as 60-70% of assets now allocated to alternative assets. This includes PE, hedge funds, and real assets (commodities and real estate), some of which are difficult (or impossible) to access via publicly traded securities.  In response, MAPs “emulates” the exposures by, for instance, holding long/short equity funds in lieu of hedge funds.

Mr. Armstrong also says that endowments and foundations have outsized exposure to non-U.S. equities and proportionally less exposure to U.S. equities, so his MAPs strategies do too. Late in the interview, he explains that it makes sense for individual investors to be more skeptical of emerging markets, about half of the world’s market capitalization is outside the U.S., and around one-fifth of that is in emerging markets. Thus, to have global equity market beta exposure, a 10% allocation to emerging markets is necessary – additional exposure can be seen as “tactical” and not “strategic.”

Based on his firm’s extensive research, Armstrong says that most of the returns by endowments and pensions are based on asset allocation, not individual security selection. Cedar Capital’s MAPs attempt to emulate those allocations so that individual investors can in turn emulate the return profiles of the world’s venerable institutions.

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