Rethinking Your Portfolio: Wealth Through an Endowment Lens

by Norman Zhang, Chief Investment Officer, Koda Capital

The full text of this paper is available below. To download a PDF copy of this paper, click here.

The investment regime that dominated the past ten years – built on loose money, a zero interest rate environment, and disinflation that benefited risk assets – appears to be ending. We anticipate a new era defined by increased volatility, protectionist policies and heightened geopolitical risks.

The Past Decade

Most market participants would argue that the era following the Global Financial Crisis (GFC), spanning 2009-2022, was unique and highly accommodative for risk assets such as equities for several interconnected reasons.

These included an unprecedented period of loose monetary policy punctuated by near-zero and, in some cases, negative interest rates, as well as quantitative easing, whereby central banks around the world injected enormous liquidity into the financial system. This was achievable under a backdrop of low and stable inflation, providing the headroom and justification for maintaining looser monetary policy for an extended period.

This environment translated to a period of substantial corporate profits, supported by low borrowing costs, technological efficiencies, globalisation benefits (in the earlier part of the decade), and financial engineering, such as share buybacks that boosted earnings per share.

Investors in risky assets, such as equities, benefited from this period, marked by the rapid rise of simpler access to investment through the growing popularity of passive investing via exchange-traded funds.

In a decade that can be described as one where the “rising tide lifts all boats,” and the biggest boats lifted the most, concepts such as broad portfolio diversification, downside risk management, and active investing were sometimes seen as unnecessary complexities.

Koda’s Investment Approach

Today’s Environment

Fast forward to today. History may look back at the previous era as an anomaly rather than the norm. At Koda, we believe that while the next decade provides ample opportunities for an astute investor to capture attractive returns, the market will no longer be conducive to the simple “set and forget” and index-tracking approach that worked so well over the past decade.

Our views are guided by the fundamental structural changes to the macroeconomic landscape. Global interest rates are higher, much higher. Central banks aggressively hiked rates starting in 2022 to combat high inflation, and some of these increases have been reversed; however, the baseline rates remain significantly elevated compared to the post-GFC era. Inflation is also much higher and “stickier,” and is expected to continue, given that the benefits from globalisation, a megatrend since the end of World War II, are reversing.

On geopolitics, while the previous era was generally characterised by increasing globalisation and stable relations between major powers, the current situation is much more fractured. The US-China great power rivalry has escalated and is impacting global trade and economic growth. At the same time, armed conflict between nations at a scale not seen since the 1970s has reemerged. On trade, there is a clear trend towards protectionism, “friend-shoring,” and supply chain diversification.

The final point of difference between today and the start of the last decade is the state of equity market valuations. Coming out of the GFC, US markets were reasonably priced at 13-14 times Price-to-Earnings. As of 2025, this number stands at 26 times, a considerably more expensive starting point compared to earlier in the decade.

Looking ahead, we believe that a different approach is necessary for investors to succeed over the next decade and that Koda’s endowment-style investment approach is well-positioned to navigate the challenges ahead.

 

Koda’s Endowment Investment Approach

Several key principles characterise our endowment approach: 

The following section provides a more detailed examination of these core concepts.

What Does It Really Mean to: Take a Long-Term Investment Horizon?

Long-term investing represents a philosophy and strategic approach fundamentally oriented towards achieving significant financial objectives set far in the future, such as building multi-generational wealth or establishing a lasting financial legacy. The term “long term” in this context generally signifies a holding period of ten years or more, often extending across several decades.

At its core, long-term investing is about building wealth systematically over time. It seeks to harness the power of fundamental economic growth and the mathematical principle of compounding, where investment returns themselves begin to generate further returns. It is predicated on the belief that, despite short-term fluctuations, well-chosen assets combined with sound investment skills tend to appreciate over sustained periods of time. Historically, this approach has stood as one of the most reliable paths to wealth accumulation for investors, particularly when compared to the inherent complexities and elevated risks associated with short-term trading strategies.

In contrast to a short-term investor, this philosophy is critical for avoiding costly errors often driven by emotional reactions to market volatility. Many investors underperform due to behavioural pitfalls, such as panic selling during downturns or chasing speculative trends.

 

Key Features

A. Mindset of Patience and Discipline

A long-term investor is defined by a specific mindset characterised by patience and discipline. Patience is more than just waiting, it is an active endurance through inevitable market cycles, including downturns. This also involves not succumbing to fear during market declines or excessive exuberance during market booms.

“Temperament, not intellect, is often the most important quality of an investor.” – Warren Buffett

Discipline means adhering to a predetermined investment strategy and plan, regardless of market sentiment or news headlines.

Principle in Practice

Koda believes that setting the proper asset allocation drives the bulk of portfolio returns. We maintain relatively stable strategic asset allocations to asset classes that our research indicates deliver the best risk and return outcomes. In selecting asset classes and investment managers, we do not chase those that have recently outperformed or sell those exposed to poor short-term sentiment; instead, we focus on those with the most promising long-term outlooks.

B. Risk Tolerance over the Long Term

Long-term investors typically possess a higher capacity to tolerate investment risk, primarily due to their extended investment horizon. This tolerance can afford to allocate a larger portion of their portfolio to assets with higher growth potential, such as public and private equities.

Principle in Practice

We do not seek to avoid asset classes or themes that exhibit short-term volatility, but have the potential to deliver longer-term value creation. Koda’s portfolios have opportunistically allocated to managers in more “risky” asset classes, including venture capital and sector-specific funds, based on a positive long-term view of the AI and healthcare themes.

C. Embracing the Power of Compounding

The engine driving the long-term returns of portfolios is the principle of compounding. Compounding occurs when investment earnings – whether from capital appreciation or income, such as dividends and interest – are reinvested, generating further earnings on both the original principal and the accumulated gains. An added benefit of adhering to this principle is that it significantly reduces friction, such as transaction costs and taxation. In regions such as Australia, significant incentives, including capital gains discounts, are available to investors who opt to defer gains.

Compounding is intrinsically linked to the long-term investing philosophy because it requires two key ingredients: time and the reinvestment of earnings.

“Compounding interest is the eighth wonder of the world.” – Albert Einstein

Principle in Practice

We view asset classes in portfolio construction as key building blocks, each with its distinct role in portfolio and compounding profiles. We do not allocate to asset classes with a primary goal of short-term trading.

• Public and Private Equity: Long-term high compounder with elevated volatility
• Defensive Alternatives (Real Assets): Stable compounders with volatility subject to idiosyncratic characteristics
• Fixed Interest (Including Private Debt): Compounders with low short-term volatility, used to offset risk in higher compounding assets such as equities

D. Organisational Alignment to Long-Term Thinking

Advising successful endowment-style investment portfolios requires complete alignment between the wealth manager and its investment teams, with a long-term focus on client needs.

Key ingredients, such as the independence of thought and incentives for investment teams and advisers to see investments through to the end, are critical to avoiding value destruction.

David Swensen oversaw the outperformance of the Yale endowment, which delivered an annualised return of 12.5% versus the S&P 500’s return of 9.7% per annum over the period from 1985 to 2020. This was due in part to the 35-year continuity of the investment process, as well as the endowment-style philosophy. In contrast, the Harvard endowment, which espouses a similar investment philosophy to Yale’s, has underperformed, with a 20-year annual return of 8.8% (as of 2024), in part due to the high turnover of investment personnel, leading to constant changes in the investment approach and sometimes unnecessary portfolio adjustments.

Principle in Practice

Koda’s unique combination of independence and equity partnership model is one of several features that aligns staff with the organisation, its portfolios, and clients over the long term.

We believe that true endowment-style outcomes cannot be achieved without complete alignment across the pillars of organisation, team and portfolio.

What Does It Really Mean to: Seek True Diversification

Diversification is a critical element in all forms of portfolio construction, including for endowment-style investors. This is applied across various dimensions – asset classes (both traditional and alternative), geographic regions, sectors, and investment styles.

Initially, diversification within the endowment model was often viewed primarily as a tool for accessing a wider array of potential return sources and focusing on minimising portfolio volatility. However, particularly in the wake of market crises like the GFC, the role of diversification has evolved to place a greater emphasis on risk control, downside mitigation, and building portfolio resilience across diverse economic scenarios.

This shift is partly driven by the maturation and expansion of alternative asset classes, increasing the use case for asset classes with more diverse correlations with traditional public markets. The complete integration of low-correlation alternative assets into portfolio design and asset allocation is what we term true diversification.

A. Integrating Alternatives into the Diversification Equation

The value proposition of integrating alternatives lies in their potential to enhance portfolio alternatives resilience. Accessing different and preferably uncorrelated sources of risk and return can potentially improve risk-adjusted returns, reduce overall portfolio volatility, and, crucially, offer downside protection during periods when traditional diversification strategies falter.

A criticism of traditional approaches to diversification is that they tend to fail precisely when investors need their protective benefits the most – during severe market downturns and crises. Assets across the board, even those typically considered diversifiers, are pulled down together as correlations spike.

Recent occurrences, such as the 2020 COVID-19 crisis and the 2022 inflation-driven selloff, are examples where the correlation between bonds and equities converged.

Alternative investments constitute a broad and diverse group of assets and strategies that fall outside the traditional categories of public equities, bonds, and cash. The following table outlines some types of alternative asset classes utilised in endowment-style portfolios. These assets provide exposure to different risk-return drivers and correlations not available to traditional investors, and increasingly offer access to parts of the economy that are no longer accessible via public markets.

Principle in Practice:

Our portfolios are built by fully integrating alternative assets into the investment process. By doing this, we aim to create and deliver superior downside protection, volatility, and absolute return outcomes compared to a traditional portfolio. The charts below illustrate the scope of diversification between a Koda portfolio and a traditional passive portfolio.

 

B. Diversifying by Sources of Return

Staying Private for Longer

There is a trend of companies choosing to remain privately held for significantly more extended periods than in previous decades. Several factors underpin this decision. Founders and existing shareholders often wish to maintain greater control over strategic direction and company culture, avoiding the intense public scrutiny and relentless pressure for short-term quarterly results that accompany a public listing. Notable private companies that have yet to list currently include OpenAI, Canva and SpaceX.

The Shrinking Pool of Public Companies Due to De-listings

Concurrent with companies staying private for longer, the overall number of publicly listed companies, particularly in markets like Australia and the U.S., has declined from its peak. This contraction is partly due to the fewer initial public offerings (IPOs) relative to historical levels and an increase in delistings for events such as mergers and acquisitions (M&A). In Australia, previously large-cap staples, including 21st Century Fox, Sydney Airport and Newcrest Mining, have all delisted without being replaced by comparable new listings. Private markets have been net recipients of the trend away from public markets.

The following table provides a high-level overview of major asset classes and the primary mechanisms through which they access economic returns. As illustrated, the addition of alternative asset classes to a diversified portfolio significantly expands a portfolio’s ability to capture the overall economy.

Principle in Practice

It is difficult to access top Australian infrastructure assets in public markets. Outside of Transurban, the premier Australian infrastructure assets are currently closely held by private investors.

Through Koda’s origination capability in private assets, our portfolios can gain exposure to core infrastructure assets, including major capital city airports (Sydney, Melbourne, Brisbane, and Perth), seaports (NSW and Brisbane), and major utilities, such as Ausgrid (NSW).

What does it really mean to: Be Prepared to Harvest Illiquidity and Complexity Premiums

A foundational building block of endowment-style investing is its long-term investment horizon. As discussed earlier, this comes with a higher tolerance for greater illiquidity and long-term risk.

These attributes present the investor with the opportunity to harvest premiums, such as the illiquidity and complexity premiums, to enhance portfolio returns.

Key Features

A. Harvesting the Illiquidity Premium

The illiquidity premium refers to the incremental return that investors demand as compensation for holding an asset that is not readily convertible into cash without significant delay or price concession.

This premium is intended to offset the various risks and inconveniences associated with such assets, which include restricted access to capital, infrequency and sometimes opaque valuations, and potential mismatches in the timing of investment exits. While there is no definitive research on the exact value of the illiquidity premium, as numbers vary widely across asset classes and measurement points, studies have placed it in the range of 1-4% per annum.

B. Harvesting the Complexity Premium

The complexity premium can be considered as an additional return that may accrue to investors possessing the capability to successfully analyse, manage, and navigate investments characterised by intricate structures, opaque informational environments, or specialised operational demands. This premium is often associated with the specialised skill set required to unlock value from such assets, rather than being a passive reward for merely holding them. It is particularly relevant in alternative assets, such as private equity or structured credit, which involve operational input from the manager and deal with non-standardised structures.

Complexity premiums vary across asset classes, and the primary driver ultimately resides in the manager’s skill. Using the example of private equity, complexity or skill premiums can range from 3% to 9% per annum.

U.S. Private Equity Performance Against the S&P 500

Principle in Practice: Harvesting both illiquidity and complexity premiums is a core feature of Koda’s endowment-style portfolios. For our Growth (70/30) portfolios, up to 40-50% of the total asset allocation will participate in harvesting these premiums.

What does it really mean to: Believe in Active Management

For an endowment-style investor to successfully execute the previously discussed elements of true diversification and premium harvesting, active management is a critical enabler.

Active management, fundamentally, is an investment approach that involves deviating from a passive benchmark index through deliberate decisions regarding security selection, asset allocation timing, or other portfolio construction strategies. The objective is typically to generate excess returns (alpha) relative to the benchmark, manage specific risks, or achieve other portfolio goals unattainable through passive replication. In most alternative asset classes where a standard benchmark typically does not exist, active management is currently the only viable option for investors.

Key Features

A. Belief in Exploitable Market Inefficiencies

A core premise of the endowment model is that not all markets are perfectly efficient at all times. These exploitable inefficiencies are particularly pronounced in assets such as private debt, private equity, and hedge funds, as well as less liquid segments of public markets, including small-cap and emerging market equities. By identifying investment managers with a unique and sustainable skill set, allocators can deliver greater returns with less risk than traditional assets can provide.

Within the typical endowment portfolio, several areas are commonly targeted for their perceived inefficiencies:

Alternative Assets: Factors contributing to potential inefficiencies include information asymmetry (private companies disclose less information than public ones), the complexity of deal structures and strategies, inherent illiquidity that deters many investors, and relatively limited analyst coverage compared to large public markets. These characteristics create a landscape where managers possessing specialised knowledge, deep industry networks, and operational expertise can potentially identify mispriced opportunities and add value through active engagement.

Less Liquid Public Markets: Beyond alternatives, specific segments of the public markets are also considered less efficient than the highly covered large-cap segment. These often include smaller capitalisation stocks, equities in emerging markets, and specific niches within fixed interest. Limited analyst coverage, lower trading volumes, and greater heterogeneity among securities in these areas can result in more frequent mispricing.

Information Advantage: Regardless of the specific market segment, leading active managers strive to cultivate an exploitable information advantage. This can be achieved through various means, including in-depth fundamental research, sophisticated quantitative modelling, or the use of proprietary data sources. While rare, there is evidence that sustainable outperformance is even possible in more efficient segments of the market, such as large-cap equities, for investment managers that have a clear informational advantage.

Principle in Practice: Australian small caps are identified as a less efficient public market where active management can add value. Since the inception of the ASX Small Ordinaries index, the average outperformance of active small-cap managers is +3-5%.

Koda takes a 100% active approach to investing in this sub-segment, and the high expected outperformance potential from active management justifies an overweight allocation relative to Australian large caps.

B. Active Management in Downside Protection

While broad diversification across asset classes, geographies, and strategies serves as the foundational layer of risk management in endowment portfolios, active management offers an additional layer for mitigating losses during periods of market stress.

Key mechanisms employed by active managers for downside protection include:

• Portfolio Flexibility: Certain active managers are not bound by index constituents or weights. This allows them the freedom to deviate significantly from the benchmark by reducing overall exposure to risky assets, increasing allocations to cash or low-volatility securities, or strategically underweighting sectors or regions perceived as particularly vulnerable in anticipation of or during market downturns. Most active investment processes are grounded in fundamental analysis, which takes into account factors such as valuations, financial leverage, cash flow and profitability. While markets at specific points can begin to ignore fundamentals (particularly in exuberant markets), companies exhibiting features have tended to protect capital during market sell-offs.
• Hedging Capabilities: Active managers can utilise various financial instruments, primarily derivatives or short-selling, to hedge existing portfolio exposures and protect against potential losses.
• Explicit Risk Management Focus: Some active management strategies are explicitly designed with risk control or capital preservation as a primary or co-equal objective alongside return generation. These strategies often employ systematic rules or manager discretion to adjust exposures based on predefined risk targets (e.g., volatility targeting) or market signals, aiming to provide a smoother return profile and limit drawdowns.

For families and not-for-profit investors, managing downside risk is important beyond the natural human aversion to losses:

• Spending Stability: For most pools of capital, there is a secondary objective to provide a stable and predictable stream of income for expenditure (individuals and families) or to support an operating or philanthropic budget in the case of institutions. Significant declines in the portfolio’s value can directly threaten the level and stability of these payouts, potentially leading to material adverse consequences in the real world.
• Preservation of Purchasing Power (Intergenerational Equity): A foundational objective of a long-term allocator is to build wealth not just for the present, but for all future generations in perpetuity. This principle of intergenerational equity requires the endowment to maintain its real (inflation-adjusted) value over the very long term. Large, unmitigated drawdowns pose a significant threat to this objective. Recovering from substantial losses takes considerable time and returns, and being forced to sell assets at depressed prices to meet spending obligations crystallises these losses, permanently impairing the portfolio’s capital base and its future spending power.
• Maintaining Strategic Discipline: Experiencing severe portfolio losses can test the resolve of individuals, trustees and investment committees. Fear and panic can lead to behavioural biases, potentially resulting in ill-timed decisions, such as abandoning long-term strategies or selling assets near market bottoms. By limiting the extent of drawdowns, effective downside protection strategies can help maintain confidence and increase the likelihood that the portfolio will adhere to its long-term investment plan through challenging periods.

Principle in Practice: Public equities are a core driver of long-term returns in a portfolio, but it is also a portfolio’s most significant source of volatility and downside risk. To maintain overall upside potential and also provide managers with the tools to mitigate downside risks when needed, Koda has allocated to a series of long/short managers within Australian and international equities. The shorting component enables managers to achieve gains even when markets decline.

Comparing Asset Allocations

Having discussed the main features of endowment-style investing, it is important to recognise that the implementation of this same philosophical approach can vary significantly across investor types, geographies and individuals. Koda’s approach is no exception, and our brand of investing is specifically adapted to the objectives and requirements of clients, and shaped by the unique characteristics of our home market – Australia.

The key differences of an endowment-style investor are most evident when comparing them against the traditional 60/40 approach. The following table summarises these fundamental differences.

Allocations represent the starting point allocations. Subject to individual investor objectives and constraints, these allocations can increase via investments through Koda’s Opportunistic Program

^Allocations are as at (30/4/2025) Koda, (31/12/2024) Future Fund, (31/12/2024) Australian Super, (31/3/2025) Vanguard, (FY24) U.S. Endowment

Three Key Observations

1. Lower Public Equities: As expected, most endowment-style portfolios, including such portfolios at Koda, exhibit significantly lower public equities exposure compared to more traditional investors, such as superannuation funds and passive investors. Instead, risk is more evenly spread across a wide range of asset classes. From a performance perspective, endowment-style portfolios are expected to relatively underperform in rapidly rising equity markets (> +15%) and outperform in normalised (4-10%) and negative-return periods.
2. Higher Allocation to Alternatives: The sample set of endowment-style portfolios holds a significantly higher allocation to alternative assets, ranging from 40% to 60% of total asset allocation. However, the composition of which will differ widely between each investor.
   1. 1. • For instance, U.S. endowments have a significant bias towards private equity, whereas Australian investors have tended to favour real assets.
         • For Koda, our starting portfolio has a heavier bias towards predictable, income-generating assets in credit (including private debt), which is geared towards meeting the likely cash flow requirements of our investor base. Note that for our investors with lower short-term income requirements, allocations to real assets and private equity can be adjusted upward, similar to the Future Fund’s allocation.
         • Over an investment cycle, the broader diversification across a wide range of alternative assets that harvest illiquidity and complexity premiums is expected to contribute to superior risk-adjusted returns for the overall portfolio.
3. Diminishing Role of Traditional Fixed Interest: Outside of Vanguard, which requires a high allocation to traditional fixed interest to ballast the growth side of its 70/30 portfolio, the role of traditional fixed interest (government bonds) in portfolios has diminished (including Australian super).

Conclusion

The investment landscape is undergoing a fundamental transformation, moving away from an extended period of stability and predictable growth into an era increasingly defined by heightened volatility, persistent inflationary pressures, and complex geopolitical dynamics.

Strategies that proved effective in the past, such as passive index-tracking and a “set and forget” mentality, are unlikely to suffice in navigating the more challenging and nuanced market conditions that lie ahead. This evolving environment requires a more sophisticated and adaptable investment approach.

We believe that the next decade of investing will be supportive of the endowment-style investment philosophy. This entails a genuinely long-term investment horizon, seeking true diversification that extends beyond traditional asset classes into a wide range of alternative investments.

Ultimately, a prudent implementation of this investment approach can provide investors with the necessary tools to navigate the challenges of the current and future market environment, one that continues to enable the compounding of wealth over multi-generational periods.