Unlike a personal retirement account, which may ultimately be liquidated and depleted over a finite time frame, an endowment is meant to exist forever and thus ride out the rise and fall of many economic cycles. By focusing on the long term, DUMAC employs a broad-based asset allocation approach that is widely diversified by asset class and management style. Because of the size of the university’s endowment, DUMAC has access to the very best investment managers, in addition to asset classes that might not be available to individuals.
Diversification across investment exposures is central to generating strong investment returns while moderating portfolio risk and volatility. DUMAC uses a framework that emphasizes the fundamental drivers of return to manage investment exposures. Each exposure plays an individual role, but all work in concert to achieve overall portfolio objectives.
Charted below are the long-term targets for each exposure in DUMAC’s framework.
(public and private investments in companies)
(direct commodity exposure, commodity-related equities, and private investments in energy,
power and infrastructure)
(private real estate and real estate investment trusts)
(corporate bonds, bank debt, asset-backed securities, sovereign debt, etc.)
(public obligations, including treasuries and agencies)
(U.S. Treasury Inflation-Protected Securities, non-U.S. inflation-linked bonds and timber)
An investment strategy focusing solely on high investment returns is dangerous. DUMAC pays particular attention to managing risk within the portfolio, controlling excessive volatility through diversification among exposures as well as the asset and sub-asset classes through which those exposures are obtained.
Because individual asset groups respond differently to similar economic or market stimuli, they often reflect among themselves a counter-cyclicality of investment return behavior. Knowledge of this differential behavior helps DUMAC select and arrange investment opportunities, which, although individually risky, dampen risk or volatility when aggregated within the overall portfolio.
DUMAC measures risk in several ways, but the most common measure used by institutional investors is the standard deviation of returns: the extent to which actual returns over a period are likely to differ from average historical returns. A higher standard deviation indicates higher risk or volatility.
The table below compares the results of DUMAC’s strategy to the results of a blend of 70 percent MSCI All Country World Index* and 30 percent Bloomberg Barclays Aggregate Bond Index. The DUMAC strategy of controlling risk within the portfolio has worked well to reduce volatility of returns by lowering the standard deviation. Also measured below is the incremental return per unit of risk, a calculation called the Sharpe Ratio. As indicated by Duke’s higher Sharpe Ratio, Duke’s return was generated with significantly less risk.
|Duke||70% MSCI All Country World/
30% Bloomberg Barclays Aggregate*
|Nominal Annualized Return||12.21%||6.97%|
* Prior to 12/31/1998, this measure used the MSCI World Index.
** Risk free rate is Citigroup 3-month Treasury Bill Index