If you’re reading this, you likely have a goal in front of you that is challenging you to think about investment planning for your college endowment through a different lens. More specifically, you’re curious about how asset classes (real vs. financial) that historically are not managed together work in combination with each other.
As the cofounder of Sound Financial Strategies Group and the investments professor at Mississippi College, discussing the differences between real assets and financial assets is something that excites me.
Knowledge is power. In this case, possessing asset class knowledge at this level — particularly when we compare what it means for college endowments vs. the individual investor — will maximize your ability to capitalize on lucrative investment opportunities for your institution.
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This is where you start delving into an area that uncovers the real investment superpower that a college endowment has vs. an individual investor. What I mean by that is, an individual investor can only invest over a finite amount of time. When you’re young, you have limited money and access to investment opportunities — those, typically, only increase as you age.
By the time you have the access and the money, your investment window is much smaller than it was in previous years.
Even if the size of your college endowment is seemingly more modest than others, you still have a substantial amount of money that will garner you a variety of investment opportunities that most individuals will not. For instance, $50 million may seem “small” for a college endowment, but it is substantial for an individual investor.
You may also be thinking about your college endowment’s financial goals more broadly. Typically, we think of financial goals personally: financial freedom, having to work vs. wanting to work; care for our family, college planning, or care for aging parents; or real estate investing for profit and enjoyment.
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Investing for an endowment is a little different because an endowment is not bound by our lifespans. Endowments, especially college or university endowments, can last for generations when they are well managed. Your university’s endowment will most likely outlive you, so use this to your advantage.
Whatever your reason, learning what real assets are vs. financial assets is essential to helping you understand what risks you may be taking with your investment choices. I want to say that again — this kind of education will not help you alleviate your risks, but it will help you understand them. Think of risk as both as a feature and characteristic, when it comes to real and financial assets. It is simply a part of their nature.
Moreover, you will think about and treat these two asset classes very differently. For instance, we have a tendency to overload on financial assets. We’ve been taught, as individual investors, that you make the most money and achieve growth through stocks. But with that point of view, we’re only talking about financial assets; it’s only part of the story.
In our society, you have ample opportunity to build a powerful portfolio of assets (real and financial) as a college endowment, but it starts with education. So, my goal here today is to empower you with that necessary education (definitions, context, and so on) about real and financial assets. They are your investing building blocks.
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The pure academic definition of real assets is land, buildings, equipment, and knowledge that can be used to produce goods and services. I would also add businesses as real assets, as they produce goods, services, and income.
Now, if you’re a college or university, real assets you may be familiar with include timberland or farmland an alumnus gifted to your school more than 50 or 100 years ago. You may also possess land surrounding your campus that is zoned industrial, but is currently only hosting trees and grass, and not much else.
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No matter the type of real asset we’re discussing, it is most often productive. But what do I mean when I say “productive”? Let’s say you’re a homeowner. I could ask you, “What does your house do for you?” I asked that question of one of the members of our marketing team recently, and she quipped in reply, “Well, it doesn’t do my taxes!”
Ha! I conceded she wasn’t wrong, but then countered: “Did you sleep comfortably in your home last night? Do you have a roof over your head and four walls around you? Do you feel safe and protected from the rain and snow?” In that way her house is productive. It is a tangible asset that does something for her.
On the other hand, financial assets are claims on real assets or income generated by real assets. For example, a stock is a claim on the ownership of a company, a land title is an ownership claim of land, a REIT (real estate investment trust) owns titles or claims to portions of real estate, and so on.
Financial assets allow us to “securitize” — an admittedly very wonky word that’s prevalent in our industry — a hard asset into a security that can be traded back and forth much more easily.
By this definition, financial assets are much more liquid with a lower barrier to entry, which is an advantage. Meaning, I can go out today and buy Tesla stock (a financial asset) with no issue. But I can’t go to Elon Musk and have him sell me Tesla, as a whole. I can’t buy Tesla’s equipment, intellectual property, buildings, or anything else that would be considered a real asset.
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Not only are Tesla’s real assets not for sale, if they were none of us could likely afford to buy them.. There’s even a slim chance that even the federal government probably couldn’t print enough money to afford some of those real assets. OK, maybe they could, but you get my point.
Again, that’s the advantage of financial assets (Tesla stock) vs. real assets (Tesla intellectual property). They are easier to acquire and, depending on the financial asset, relatively easy to get out of.
Let’s take a step back and look at ourselves as individuals once more.
I always tell people, you make a living and you grow your net worth applying your skills and work ethic in your career. This is where you grow your income that you then, in turn, invest and save into financial assets. You don’t make a living trading and growing financial assets; (for most people) that’s not your work. That’s not what’s going to grow your real wealth — unless it is a part of your skillset and career.
As you grow more financially independent (e.g., you grow into retirement or financial freedom), you can liquidate more of your real assets — not all of them, mind you — and move them into financial assets, as they are easier to manage. Heck, if you want to leave your family a meaningful financial legacy, do them a big favor and have everything liquidated at your passing and leave them nothing but financial assets.
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To be clear, this is not a blanket, one-size-fits-all recommendation. Certainly, there are types of income producing real assets that you may want to pass onto your family. If you’re a member of the Musk family, and you actually own (a lot of) Tesla, you may not want to do that; you will want to keep Tesla. The larger point here is that financial assets are easier to pass down and easier to manage.
However, these are recommendations for individual investors.
... but endowments have a different superpower.
The classic 60/40 model that Harry Markowitz wrote about when explaining Modern Portfolio Theory has been adopted by many retiring investors. Yet, a college or university’s endowment (theoretically) has no investment time horizon.
Therefore, investment committee leaders and stakeholders such as yourself can take certain risks over far longer periods than the average person. For example, a university endowment could invest in timberland and comfortably wait 30 years for the first dollar of profit while that investment might make the rest of us very uncomfortable. An endowment can also take risks on start-up companies or absolute return strategies, and balance these with risk management strategies.
We are not suggesting gambling with investments just because you have time and money — quite the opposite.
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Because you have time and money, you should balance your portfolio between real and financial assets. Time and money are your superpowers, giving you the best chance to dial your portfolio into asset mix giving you the highest likelihood of profit.
University endowments like Harvard, Yale, and the University of Texas have crafted models unique to their universities. These are an ingenious mixture of real and financial assets. Your university could do the same. No, you may not get the deal flow these enormously large endowments get. But you have countless opportunities throughout the US. There are far more small tracks of real estate, bit-size private equity opportunities, and absolute return investment strategies that fit you more than the Harvard and Yales of the world.
But you must take advantage of these.
As I said at the start of this, financial education, like knowing the difference between real assets vs. financial assets, is very important. Knowing what they are, as well as their benefits and challenges, can help you make smart decisions for your college or university endowment.
Recently, a retiring university leader shared his frustration with me that his college used an endowment investment advisor who catered to larger universities.
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These large universities sucked up all of the deal flow, gaining the best deals for themselves and leaving the “left-overs” for his college. Yet, if he had understood how real assets worked and that position size could open up opportunities, his college endowment would not have tried to compete with the large universities. And he probably would have fired his investment advisor for charging him the same or higher fees as his larger university counterparts and yet giving his college a lesser deal flow.
Your college’s endowment has wonderful opportunities, hidden gems in the investment world, waiting for you to discover. Keep in mind, however, that there is risk inherent to any investments you make, no matter how informed you may be. For example, understanding how to borrow money to buy financial assets is its own can of worms. Still, education and financial literacy when it comes to assets can help you minimize risk rather than creating new risk, where you could be creating opportunity.
More simply, when it comes to financial topics, knowledge is power.