We talk to an investment firm which uses an "endowment fund" mindset to running assets on behalf of clients such as family offices.

Cambridge Associates, the global investment firm working with clients including family offices, says that it is adding exposure to US government bonds as their yields have risen to more attractive levels.

For years, government bond markets, such as US Treasuries, had their yields squeezed by more than a decade of ultra-low official interest rates. Asset allocators wondered whether government bonds could play a useful role as ballast in portfolios to offset difficult times for equities. This also explains why there’s been such a shift to private market investing over the past decade.

However, since the US Federal Reserve started to hike rates to curb the highest inflation for four decades, bond prices, which move in opposite direction to their yields, have fallen. 

“As rates have gone up this year, we have begun to add back some duration as US government bonds have become more attractive with the 10 year yield at 3 per cent,” Chris Ivey, head of European private clients, told this news service in a recent call. (Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. Duration is not the same as a bond’s term or time to maturity.) 

“Portfolios typically have an allocation to cash and high-quality fixed income. In recent years, with fixed income looking unattractive, we have preferred cash. Each portfolio is different but holdings of 5 to 10 per cent are typical,” Ivey continued. 

“It has been an awful first half of the year in the markets with a 60/40 mix of global equities and bonds down 16 per cent in US [dollar] terms. The picture is somewhat better if you are in sterling or [are a] euro-denominated investor,” he said. 

For all the pain in markets and the volatility, it is reassuring how calm Cambridge Associates’ clients have been, he said. 

“We have long-term clients who have been through similar situations before and through that they have learnt the importance of sticking to their strategy. Calm has been evident in investment committee meetings where [the] focus has been on rebalancing and seeking opportunities,” Ivey continued. 

The Cambridge Associates approach is to build endowment-style diversified portfolios, he said. “An endowment style portfolio has a high allocation to equities/growth assets which is needed to generate a high real return. The growth assets also typically include a significant allocation to private equity and venture capital. The portfolio is well diversified and includes allocations to diversifying strategies and hedges against inflation and deflation.”

The firm has beat the drum for some time about the merits of private market investment, as seen in this report on returns here. 

Creating portfolios that can withstand stormy weather is clearly a big priority. Inflation is top of mind for many clients, not surprisingly with rates so high. “To hedge against inflation, CA uses a basket of asset classes with inflation-hedging properties including: gold, commodities, real estate, infrastructure and index-linked bonds,” Ivey said. 

“Absolute return hedge funds have done well, such as macro funds, CTAs and others. We have taken some profits on hedge funds,” Ivey continued. 
 

Exposure to private markets
Ivey picked up on a theme that has become commonplace in wealth management – the shift to private markets. 

“Our clients want to build private equity allocations. These allocations have been creeping up over time. Overall, family offices’ allocations can approach 30 per cent, and our top performing clients over the long term have allocations [of] around 40 per cent,” Ivey said.

Family offices tend to be willing to embrace more risk in their private allocations. They are more willing to include small and emerging managers than large institutional investors who tend to focus more on the large-cap spaces, he said. 

“We try to identify new and emerging managers quickly, and early. Managers, for their part, are interested in adding family offices as LPs – particularly those where there may be some strategic benefit, for example, through the family’s network in a particular industry or geography,” he said.

Areas of interest for investors include “disruptive tech.” Cambridge Associates prefers to access this via seed capital and early-stage firms where valuations remain more reasonable, and in real assets strategies based on decarbonisation and the smart cities of tomorrow. 

What sort of risks weigh on CA’s mind?
We build diversified all-weather portfolios, so the risks we worry about tend to be more related to the portfolio than the macro environment. Of course, regulation in China, inflation and a recession are things we need to be aware of but if we have the right asset allocation we should do well over the long term,” he said.

“Hence the risks we pay attention to are more around liquidity, manager concentration, exposure to a particular style, sector or geography etc. The way that China banned forms of private education, for example, shows that investors with China exposures must be diversified. There are limits being imposed on the ability of Chinese firms to list in the US,” Ivey said.