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Most investors react emotionally when markets become volatile. Family offices don’t.
In this episode, Dave Wolcott is joined by Pantheon’s Director of Alternative Investments, Portfolio & Capital Markets, Michael Alexander, for a behind-the-scenes look at how sophisticated investors build resilient portfolios. They break down the Investment Policy Statement (IPS), the endowment investing model used by institutions like Yale and Harvard, and why disciplined portfolio construction often outperforms emotional decision-making.
What You’ll Learn
- Why every serious investor should have an Investment Policy Statement (IPS)
- How the endowment model uses alternative investments to build long-term wealth
- How disciplined portfolio governance helps investors avoid costly emotional decisions during market volatility
Michael Alexander is Pantheon Investments’ Director of Alternative Investments, Portfolio & Capital Markets. With more than two decades of experience advising family offices, institutional investors, and high-net-worth families, he specializes in portfolio construction, manager due diligence, private markets, and alternative investment strategies designed for long-term wealth preservation and growth.
This episode covers portfolio allocation, family office investing, alternative investments, wealth strategy, investment policy statements, institutional investing, private equity, private credit, real assets, portfolio diversification, risk management, accredited investors, and long-term wealth building.
So this is how we build investment portfolios. We’re using an endowment model and the term was coined by Yale and Harvard back in the late 80s. They were the founders of this portfolio allocation and they were very successful at it. And what they do is they basically take your 60-40 model equities, bonds, and they throw it out the door. Like, no, we’re not managing money that way. We’re gonna put 65 to 70 % of your assets in alternatives.
Now I want to introduce someone who operates behind the scenes at Pantheon, but whose expertise directly impacts every investment decision we make. Michael Alexander, our Director of Alternative Investments of Portfolio and Capital Markets. Mike brings over two decades of experience working with family offices, institutional allocators, and high net worth investors, managing and evaluating private equity, private credit, hedge funds, and real assets at a level Most individual investors never get exposure to. If you’re a high fact finder, you’re gonna love this. And if you’re not, that’s exactly why we have Mike on our team. So you can leverage his depth, ask better questions, and think at a higher level when evaluating opportunities. This is what it means to plug into the right network. Mike, we’re grateful to have you lead this session.
As Dave mentioned, I’m gonna walk you through how we create an investment policy statement. This is something we do for our VFO clients. We actually get input from them and we create the investment policy statement and we work with them in terms of implementation, strategy allocation, portfolio design, changes, et cetera, et cetera. So that’s what we’re gonna walk through today. Okay, so the first question is, what’s an investment policy statement? Simply it’s a roadmap, right? It’s document that’s gonna govern how you allocate capital, right? It’s gonna set up. It’s going to outline your investment objectives, your risk return tolerances. It’s essentially one of my clients refer to it as the constitution for managing capital.
All right, so it’s a roadmap. It establishes accountability, right? So you set up your own investment committee, right? You have people that manage that. Manage the money, is us, you have, and then you are the decision maker. You make the decisions in terms of how you want the capital allocated based on our recommendations. And it’s, really built to survive bear markets, bull markets, and generational change.
If you’ve ever wondered how the wealthy use energy investments to reduce their tax bill while generating cashflow, we just answer to every question on camera. Go to pantheoninvest.com forward slash energy to find out.
So why why use why use investment policy statement, right? Why do you need it? Well, the first thing it does, the first thing it does is it creates governance discipline. And I want to pause for a moment on that. Because so many times people have a knee jerk reaction to the market. Right. Markets down 20 percent. What do I do? You know, that type of that type of reaction. But let me let me just let me digress for two minutes. Real story, you guys remember March of 2020, right? Dow Jones, I think, was down about 25, 30 percent. And at that time, I was managing money for a Japanese family. And we had an investment portfolio set up. Half of was in hedge funds. The other half was in illiquid lockup vehicles. That was what he wanted. So I had it structured up. And I get an email from him saying, what do we do?
Obviously, the knee-jerk reaction would be to sell, but can’t sell the lockup vehicles. You’re locked up. Can’t do anything there. Can’t sell the hedge funds. I mean, you can get out of hedge funds, but it’s gonna take you three months. But he had a, he had 5 million in the cash account that we were using for capital calls. Okay, so that was kind of our, our working capital. So what do we do with that? Set up a Zoom call, get him on the call, get his investment committee. That was, it was he and two of his children were on the committee. And we had a third party gentleman who was managing the cash account. So we get on the phone, right? Zoom call, it’s eight o’clock my time, it’s seven in the morning his time. And first thing the financial advisor says on the cash account is, sell everything, go to cash. We don’t know what’s going on.
Wait, wait, wait, time out. That was that knee jerk reaction, right? I said, wait a minute, what’s our investment policy statement say? Because we had one. So we pull it up. Sure enough, two bands, right? There were two, there was two drawdown bands. One has the hedge fund portfolio lost more than 15%. Well, we looked at the hedge fund portfolio. They were down 8%, 9%, right? If the market’s down 20%, 25%, the equity market, hedge funds are going to be down about 8%, 8 to 10%. That’s how they’re built, right? So we’re like, all right, well, we’re okay there, check. And then the next drawdown target was volatility. What’s what? Volatility in the equity S &P 500 or the VIX, I’m sorry, is more than 20 % raises a red flag while the VIX hit 63 that day. I mean, you guys remember that, the VIX was shooting up like a rocket. So like, okay, so the investment policy statement called for re-underwrite all the hedge funds. Find out what’s going on, and then we make a decision.
Okay, so that’s the first guardrail we hit. So it took me two weeks. I got on the phone with all 10 of the funds, called them, talked to them, said, okay, where do you stand? Where’s the portfolio? Are you guys having any margin calls? Everyone’s good. We’re all good. A couple of funds were down over 30, 40%, okay, in the credit markets. They were in RMBS and CLO market. Okay, so those spreads widened out on credit. So I went back to the investment committee. Get the guy on the financial advisor line, told him what happened. And so we collectively agreed that we’re not gonna just liquidate the cash, I’m sorry, the equities, the 5 million. We’re gonna take 2 million, we’re gonna sell 2 million, we’re gonna take those loss, we’re gonna harvest it for tax purposes, and we’re gonna reinvest 2 million now and put the money in. We’re gonna go the other way. We’re gonna take the contrarian view and go against the market. So we did that.
So the moral of the story is everyone knows how 2020 turned out. I mean, the moral of the story is we didn’t, it wasn’t a heroic action. It was just that we didn’t have a knee jerk reaction, right? It was, had this thing in place to govern us when things go crazy. And I think that’s the whole point is just have it in place so you can govern what you do. Again, risk budgeting, talked about establishing volatility bands within your portfolio. So, you know, if things move against you, you have a plan in place.
And then stakeholder alignment. Again, this puts you, your family members, all on the same page for how the portfolio should be managed and governed going forward. Again, this should last a while for your next generation, for your kids.
So the core philosophy, the endowment model. I think you’ve heard Dave and I mentioned this. If you haven’t, we’re going to hear it. So this is how we build investment portfolios. This is we’re using endowment model and the term was coined by Yale and Harvard back in the late 80s. They were the founders of this portfolio allocation and they were very successful at it. And what they do is they say they basically take your 60 40 model equities bonds and they throw it out the door like, no, we’re not managing money that way. We’re going to put 65 to 70 percent of your assets and alternatives. You’re to have a small equity allocation, you have 15, 20 percent in equities and the rest in cash. And so that’s what this that’s what our philosophy is modeled after.
You’re going to have equity growth characteristic bias in the portfolio. You’re going to have a high allocation to alternatives. You’re going to have a high allocation to illiquid investments such as real assets, meaning oil and gas, real estate. You’re going to have an active manager selection, which is me doing the due diligence like I showed you guys this morning on new funds that go into the portfolio. And you’re gonna take a long duration capital base. In other words, 15, 20 years. That’s the endowment model.
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