Why Does FINRA Have An Investment Portfolio?

So here’s a weird one involving FINRA that you might have picked up in the last few days. Apparently, it has a large, $1.6 billion, investment portfolio and the returns have been weak, according to the Wall Street Journal, underperforming a 50/50 equity/fixed income portfolio for quite a few years.

The WSJ article is woefully incomplete. It doesn’t say what the purpose of the portfolio is, it is unclear how they can even have a portfolio and there are no specifics as to what the portfolio is benchmarked to other than a reference to a custom benchmark. The origin goes back to 2004 and it came out of the blocks trying to emulate the college endowments which back then were revered. As a side note, the tide may have gone out some for quite a few of the endowments but there is still plenty to learn about asset allocation from them.

As the story goes, the FINRA portfolio decided to significantly reduce its equity exposure in, um….2009. The article provides no details on how much equity exposure it had back then, but the portfolio underperformed a 50/50 in 2008, or how much it has now but there is a quote from a spokeswoman about targeting a “much more conservative approach than a 50/50 benchmark.”

The particulars of the news story are pretty muddy but there are a couple of conclusions that I think stand up that can be learned from. Starting a fund designed to emulate endowments at the peak of that fad was clearly performance chasing and if it cut its equity exposure as an asset allocation decision in 2009, even if it went from 20% down to 10%, someone panicked.

I have been a huge fan of endowment-style investing going back to the 90’s not as something to emulate but to learn from, I have absolutely been influenced by them as far as using what are now referred to as alternatives, that I was calling diversifiers back when I started writing about them.

Moderation has been and always will be, IMO, a key to endowment-style exposure in a retail sized account. The logic is simple. Over long periods of time, equities prove out as being the top performing asset class. That, of course, includes all the booms and busts. With that performance goes enough volatility than can be uncomfortable and so diversifiers, which tend to have low correlations to equities, offer the promise of lower returns but can help smooth out the ride. If you use something in this regard that you believe has a low or negative correlation to equities and equities are the thing that goes up the most, most of the time, how much then do you really want of the asset class that doesn’t go up most of the time?