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moneysense.ca, 8/06/06
Core and Non-Core Asset Classes
I am reading Unconventional Success written by money manager David Swensen and one of the important concepts he talks about is the idea of core assets, which he defines as:
Core asset classes share a number of critical characteristics. First, core asset classes contribute basic, valuable, differentiable characteristics to an investment portfolio. Second, core holdings rely fundamentally on market-generated returns, not on active management of portfolios. Third, core asset classes derive from broad, deep, investable markets.
Core asset classes discussed in the book include domestic (US) equity, US treasury bonds, inflation-linked bonds, foreign developed equity, emerging markets equity and real estate. Domestic corporate bonds, high-yield bonds, tax-exempt bonds, asset-backed securities, foreign bonds, hedge funds, leveraged buyouts and venture capital fall into non-core category. The bottom line is that average investors can focus their investing on core assets and safely ignore everything under the non-core category.
moneysense.ca, 8/06/06
This is just one man’s opinion, but I disagree with some of the categories that are classified as “core” investments. For me personally, my retirement horizon is 25 yrs away, so in my opinion, a “core” investment is something that is likely to still exist 25 yrs from now. My “core” holdings does include real-return bonds, one of the big 5 banks as well as a diversified mutual fund holding an index of large cap Canadian companies and REITs.
Although I personally continue to invest in the US market, in today’s environment of record US deficits & spending, I consider any US investment highly speculative and therefore NOT a “core” investment holding. It is, in this one man’s opinion, very high risk. I feel the same way about foreign and emerging markets, where poor choices by foreign governments can wipe out your investment portfolio. Just take the recent nationalization efforts in Venezuela and Bolivia as examples.
In the opposite direction, asset-backed securities can be safe depending upon what asset is backing that bond. For example, a real estate backed bond can, in my one man’s opinion, be classified as a safe and therefore “core” investment.