How to Invest Like an Endowment

Well I don't think we can invest exactly the way endowments do, but we can put our money to work in similar ideas and themes.

The big "macro" behind these funds is that they diversify across many types of assets such as private equity, commodities and various hedge fund strategies -- not just stocks, bond and cash. And it's true that there are stocks, exchange-traded funds and other kinds of securities that provide access to similar, if not necessarily identical, asset classes. Selecting a couple of these themes and adding them to your portfolio can improve your diversification and boost your returns.

The reason I say we cannot invest exactly like endowments and sovereign wealth funds is that there is no perfect substitute for some of the things they buy, and they're simply not available to small investors. For example, Jack Meyer, the former boss at the Harvard Management Company, is well known for getting exposure to timber by buying timberland in New Zealand.

Timber has a low correlation to stocks and a track record of steady price appreciation over long periods of time. I believe in the concept so much that I have owned Plum Creek Timber for clients for years. Building on that idea, Claymore Securities will soon be bringing the Claymore Clear Global Timber ETF to the market. The ETF will own stocks, not the commodity.

Claymore Clear Global Timer, Plum Creek or any of the other commodity stocks and ETFs could be great long-term holds, but it is not the same thing as owning timberland in New Zealand, Sweden or anywhere else. Some of the effect is captured but not all.

Foreign assets of all kinds are important components in the portfolios of endowments and sovereign wealth funds. Again, I don't think the exact strategies they use can be perfectly replicated, but the exposure can be approximated. Rydex has eight single-country ETFs and Barclays has three exchange-traded notes for the most popular exchange rates. The single currency ETF that I think makes the most sense for diversification is the Rydex Australian Currency Shares .

The simple case for Australia is that it is a commodity-based economy and its currency is therefore a better diversifier than with the euro or the British pound. Also, there's a lot less trade between Australia and U.S. than there is with Australia and Canada, which is also a commodity based economy. Furthermore, Australia is at the other end of the economic cycle than the U.S., meaning its GDP is growing faster than ours and the Reserve Bank of Australia is tightening, rather than loosening, monetary policy.

FXA yields over 5%.

Foreign bonds, both emerging-market and developed, have been available through closed-end funds for years. Soon there will be ETFs in this space, too. The first one to come is likely going to be the PowerShares Emerging Market Sovereign Debt . Also in the registration pipeline is the iShares JP Morgan USD Emerging Market Bond Fund (no symbol yet). State Street has two very interesting products in the pipe line as well: the SPDR Lehman International Treasury Bond and the SPDR Barclays Capital Global TIPS ETF.

I have been a big believer in the water theme, as this is obviously a scarce resource. There are four ETFs available that are direct water plays; PowerShares Water Resouces Portfolio , First Trust ISE Water Index , PowerShares Global Water Portfolio and Claymore S&P Global Water ETF.

Water speaks to the very heart of the modernization behind the boom going on around the world. These ETFs, or the stocks they invest in, are likely to benefit from infrastructure build-up in developing markets, which will bring them new business. Their share prices could also benefit as they attract big investors looking to profit from the boom. China seems like a perfect example of a sovereign wealth fund that would invest in the water theme.

PowerShares offers access to food, another scarce resource, with the DB Agriculture ETF . Van Eck recently listed the Market Vectors AgriBusiness Fund to access the companies working to solve the world's food shortage.

There are also investment vehicles tracking energy and metals commodities to choose from. PowerShares has eight commodity ETFs, Barclays has three ETFs and three ETNs and there are a few other commodity products out there from other providers and many more in registration.

Here's the difference between owning these funds and what an endowment would do: If we buy streetTracks Gold Trust , we are making a passive investment in gold. But an endowment fund can hire a hedge fund or other manager with a successful active management strategy. More often than not, I might think the active strategy will have the better result, but you can participate in this investment theme to some extent.

A resource theme that does not get much attention in this context is uranium. Why uranium? There are 230 nuclear power plants in various stages of planning or construction. Each plant requires several hundred tonnes of uranium per year. Over the next decade, demand should increase substantially. There are plenty of mining stocks in the U.S., Canada and Australia but perhaps the purest exposure would be to simply buy shares in Uranium Participation Corp.

What about wind power and something like Danish company Vestas Wind ? OK, you get the idea.

Another big asset class tht endowments and other big investors allocate money to is private equity. I just wrote about the new PowerShares International Listed Private Equity ETF . I do not believe that the ETFs in this space offer true private-equity exposure, but the companies in the funds are likely to benefit as they get hired by the various endowments and sovereign wealth funds to manage money. You are not accessing the pools of investment capital so much as benefiting from them.

The idea here is not that you should run out and buy all these themes, but simply that you should be aware they exist. You're unlikely to copy an endowment fund's strategy, but you can easily begin to capture a couple, just a couple, of similar effects for your portfolio. And let me be clear, I am convinced this is possible.