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Everyone likes to follow what endowments are doing because there is the assumption that they represent smart money. If universities are where the smart people are, then it stands to reason that their money managers are also smart. The return numbers suggest that endowments don’t have a lock on good performance. In fact, simple allocations have proven to be more effective at generating return. The Bogle model which is a simple variation on the classic 60/40 stock/bond mix is a perfect example. This asset allocation in made up of 40% US equities (total US stock index), 20% international equities (total international stock index) and 40% bonds (total bond index). The Bogle allocation works when compared with endowment allocation which have been tilted to alternatives and away from equities.

The markets were generally calm for January even with the upheaval and uncertainty from the new Trump Administration. The surprise for many investors is the continued low volatility in the markets which seems inconsistent with the political uncertainty faced. While hedge funds generally did well for the month, there were some negative stand-outs, the macro and CTA strategies.

This above chart from thetrustedinsight.com provides an interesting tale about asset allocation for large endowments. Forgot about the traditional 60/40 stock/bond mix. Forget about the 50/30/20 stock/bond/alternatives mix. If you don’t need liquidity, as is the case for the endowment portfolio allocations, a mix between liquid and illiquid is a better base framework. Hold private equity and real estate as core allocations. This core is for long-term appreciation and cash flow greater than bonds, but is generally illiquid. Take money from fixed income and cash. Take funds from public equities and use hedge funds, which may have mixed liquidity, as an additional return enhancer. The public equity and bond/cash portion of portfolios is between 25 and 50%, while hedge funds are from 7.5 to 32.5% for these key endowments. The majority of their allocations are not with traditional equity and bond beta.

There are a lot of labor statistics to analyze to measure what may happen with fed policy and interest rates. One of the key problems is trying to place all of this information on a single page or in a visual format that can do proper comparison with the past and provide analysis of the present. The Atlanta Fed has achieved that goal with their new labor spider graph.

Our sector indicators have all pointed to more trendless behavior for the major asset classes. The only major trend was a decline in the dollar for January and stronger moves higher for precious metals. With higher inflation expectations, and policy uncertainty, there are fundamental reasons for these moves.

Emerging markets have been a tough place to invest especially in equities during the post Financial Crisis period. We include a stock index (EEM), and bond index (EMB) and a commodity index (DJP) for some simple comparisons of three ways to play emerging markets. After a strong rebound in 2009, emerging market equities have generated no returns for investors. Slower growth, poor commodity markets, and a stronger dollar have left equity holders with nothing to show for seven years. Emerging market bonds have told a different story with strong consistent gains since the Financial Crisis even with the strong dollar move over the last few years.

It was a positive month for risky assets, albeit more one of consolidation and than return break-out like what was seen last quester. Global markets outside of the US, especially emerging markets, showed large gains after a weak fourth quarter. The dollar gains post-election were partially reversed which added a tailwind to non-dollar investments of about 2%. After accounting for currency changes, developed non-dollar returns are back in-line with the US.

“When as a young and unknown man I started to be successful I was referred to as a gambler. My operations increased in scope. Then I was a speculator. The sphere of my activities continued to expand and presently I was known as a banker. Actually I had been doing the same thing all the time.”
– attributed to Ernest Cassel by Bernard Baruch

After the euphoria in small cap, value, and growth stocks post the Trump election, the markets have calmed and moved slightly upwards. Global equities and emerging markets stocks were the big winners for the month. These moves were a degree of catch-up to the outperformance in US stocks. Even with the poor print for fourth quarter GDP, equity investors are discounting better growth in 2017.

Would you buy insurance where the value changes every day with market conditions? An “insurance contract” that may provide a hedge against equity risk today only to see the value of the hedge disappear tomorrow? Of course, the value can appear again, but investors may not have any guarantees. This is recent problem of investing in bonds as a diversification tool. The value of this diversification has become more variable.

There are few statistical facts more interesting than regression to the mean for two reasons. First, people encounter it almost every day of their lives. Second, almost nobody understand it. The coupling of these two reasons makes regression to the mean one of the most fundamental sources of error in human judgment.
-Anonymous from What the Luck? The surprising Role of Chance in our Everyday Lives by Gary Smith

More money is lost by players who know what the right thing to do is, but don’t do it, than for any other reason. Having a strategy, a game plan and the discipline to stick to it are, along with a sufficient bankroll, the four most important thing that a player needs to be a winner.

– Ken Warren poker writer on Texas Hold ‘Em

Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who have been, and ever will be, animated by the same passions. The result is that the same problems always exist in every era.

– Niccolo Machiavelli