A question came in about university endowment fund investing and how to emulate those funds. Mebane Faber has done far more work on this and if this is something you care about you do need to visit his site. There were also some other great reader comments that came in on this subject over the weekend as well.The two endowments that get the most attention are Harvard and Yale. Some of the other prominent ones I have heard of include University of Virginia and Rice University.
The fund that has had the best returns, by far, but gets almost no attention, is the endowment at Grand Lakes University, pictured on the left. You probably know about their diving team but no one talks about the endowment.
Seriously, trying to emulate an endowment seems less than ideal to me. This is not about their results but more about our access. By now everyone knows Jack Meyer (the chief at Harvard Management before Mohammed El-Arian) did very well buying timber land. Timber has a low correlation to US equities and the supply and demand characteristics have been favorable more often than not.
I believe in the idea enough that I own Plum Creek Timber (PCL) for quite a few clients. Claymore has a timber stock ETF coming fairly soon that I will write about for TSCM and depending on what's under the hood I might swap, we'll see. My belief in the idea notwithstanding, I don't really think of PCL as being similar to owning acreage in New Zealand like Harvard was able to do (not sure if they still own any).
Further, I would not think of any of the open ended 130/30 OEFs as being the same as a long short hedge fund either. If you have any interest in buying a 130/30 fund take a look at a lot of them on a chart. Plenty of them did very poorly. Some of the other hedge fund strategies they might employ probably aren't available, conceptually, in an exchange traded product.
As far as private equity goes, I do not think of the private equity ETFs, there are two now, or the component stocks in those ETFs as being the same thing as a private equity fund. Someone could probably argue they are close but I just don't think they capture it.
These areas comprise most of the endowments. Regular old stocks and bonds will be the vast majority of your investment portfolio, not so with the endowments though.
Just because our portfolios will not look like a college endowment does not mean we can't learn a lot anytime David Swensen or the like gets interviewed or writes an article. This same sentiment probably applies to all the luminaries in the field, but I just don't think our portfolios will look like theirs, Mebane's great work notwithstanding.
20 comments:
Roger...exactly my thoughts...all about access and we just do not have it..and when we do it will be right on the cusp of a dangerous time to start allocating there...take the ag etf, MOO, as an example. And, you hit all the major areas: commodities, long-shorts, private equity....that separates us from those that can gain access to these asset classes. I think that when you floated the wish list for etfs that this shortfall was evident some time ago. Thus, this is why I am looking harder at managed money. Another asset class I would add: small tomicrocaps both domestic and intl. Ralph Wanger's brilliant time at the helm of Acorn has shown how well this asset class does when the larger mkt is going south. Currently, a significant number of stocks held by Acorn are on foreign exchanges. Another problem in access...which it seems that you have bridged to some extent. /jasper
I suggest that anyone who would like to emulate Yale's endowment with a simple portfolio of ETFs, read Swenson's book: Unconventional Success: A Fundamental Approach to Personal Investment
You will fare a hell of alot better following Swensons advice, than you will buying double short ETFs (as Rog has done) at the market bottom.
anon 8:28. Please share your genius with this audience by listing your ETF holdings and when you bought them. Perhaps if you hold such investing wisdom,you, too, should start a blog and quit dropping your waste products here.
To Roger and whichever poster mentioned Don Coxe, thanks very much. I listened to his 30 minute podcast last night, and was really impressed with this guy. His comments on commodities, housing, world markets, just his global market grast was probably the most intelligent I have heard. (you are right up there near the top Roger). Anyway, thanks again. Following your comments, I purchased a Fidelity
SE Asia Fund, and an Emerging Market Funds about a month ago, and they have been on fire.
Also keeping about 3 percent in TWM as a parachute.
Lastly, Roger, regarding your comments about skipping the political commentary during the Fox
Saturday morning shows (which I usually watch),
it is hard discount the relevance of politics to the markets, no? Taxes on oil, increased regulation on drug prices, cap gains taxes, the list goes on and on. I think it is wise to know which candidates are most likely to start giving $5000 to each baby, etc. as Hillary proposed this weekend. Cheers, Scoot.
http://www.hardassetsinvestor.com
For further exploration into
commodities, a real great site, just discovered. Recm'd by Jim Wiandt..a fine source.
Scoot, thanks for the kind word. When there is actual news it does matter, yes. The market, though, tends to start pricing these things in before actual news happens. I am probably more interested in how the market starts to process the threat of changes and candidly I find written commentary in the WSJ to try to learn something along these lines.
I will add that it is way too soon for me to care a lot about the presidential candidates and since the changes they campaign on come far short of ever being implemented it could be argued that the election is irrelevant. I don't feel that it is totally irrelvant but it does not matter as much as people think.
Re HAI...the folks at Index Universe do most of the writing for HAI, I have contributed two article to the site.
Roger,
Both Yale and Harvard have big allocations to absolute return asset class. What do you think about DBV? I figure you can use DBV (Powershares G10 Currency Harvest) to fill out this class since the carry trade strategy is an arbitrage strategy, which should be absolute return. Right?
Another ETF I'm looking at is PDP (Powershares Technical leaders), which I would count as a 'strategy diversifier' class since I have a lot of buy-and-hold index funds in large caps, small caps, reits, intl. In this case, yes, PDP would be adding more equities to the mix, but it's a different strategy of equities. Do you think there's any merit to adding this or would it not help in diversification?
I'm looking forward to the timber ETF for commodity as well.
Thanks for your insight and a wonderful blog. I read it daily.
-Art
I have written about DBV several times and am favorably disposed to the concept but I think you might be more favorably disposed. I don't really think in terms of absolute returns, I think it more as low beta/low correlation/some yield. I realize this may be splitting hairs but I think the mind set is a little different.
I have never looked at PDP. It sort of does not fit with top down very well in that you can't know what it will have next quarter. This does not make it bad just tough for me to fit in to what I do.
For me, a simpler path is mostly long, a few low corrleation ideas and a good amount of yield. This tends to be simple which I prefer.
Too much pursuit of endowment emulation is complicate things. Again, doesn't have to be a bad thing but it is more complicated.
The endowments are almost impossible to emulate for the average retail investor
True.
FWIW, Swenson had recommended an ETF portfolio as part of Paul Farrell's series on lazy portfolios.
See "Yale Portfolio" on the second page of this article:
I track the individual year performance here: Swenson portfolio. Note that, since he uses ETFs, I only have hard data for a couple of years.
Re skipping the politics. Roger, you cannot simply skip the commentaries, you have to learn which candidates intend on wasting half a trillion dollar on a vendetta war...
i'd much rather give $5000 to our babies.
Kudlow put it best: "All that money we wasted on New Orleans that we could've spent in Iraq." and that's a direct quote out of his mouth.
"All that money we wasted on New Orleans that we could've spent in Iraq." and that's a direct quote out of his mouth."
This makes no sense. Kudlow is crazy if he really said that and should be fired.
he should be fired... but that's a different topic... it was about 3-4 weeks ago during a segment on New Orleans on his CNBC t.v. show... he kept yelling for 15 minutes about the money spent with nothing to show for, accusing everybody except the administration and FEMA of wasting the money and he closed with that awful sentence... i almost puked.
Swenson (Yale) describes in detail the classic mistakes made by amateur investors.....
Selling into weakness (ie panicking) is the biggest sin....
"Seriously, trying to emulate an endowment seems less than ideal to me. This is not about their results but more about our access. By now everyone knows Jack Meyer (the chief at Harvard Management before Mohammed El-Arian) did very well buying timber land. Timber has a low correlation to US equities and the supply and demand characteristics have been favorable more often than not.
I believe in the idea enough that I own Plum Creek Timber (PCL) for quite a few clients. Claymore has a timber stock ETF coming fairly soon that I will write about for TSCM and depending on what's under the hood I might swap, we'll see. My belief in the idea notwithstanding, I don't really think of PCL as being similar to owning acreage in New Zealand like Harvard was able to do (not sure if they still own any)."
Just an opinion, but I think the meat of emulating endowment isn't about buying timber in New Zealand or having access to top-tier private equity managers.
I think the meat of the matter is in expanding the asset class selection from just stocks-bonds-cash to all sorts of alternative asset classes that used to be completely ignored and mostly still are to this day, which means things like real estate (REITs), commodities and precious metals, and within stocks really being inclusive by looking at stuff outside the U.S.
Compare these two portfolios over the past several years. Portfolio 1 is divided between U.S. stocks, U.S. bonds, and cash. Portfolio 2 has international stocks, emerging, commodity exposure, real estate exposure, etc. Portfolio 2 has beaten the pants off portfolio 1 the past several years with probably a lot less volatility. That is the takeaway for me from the endowment approach.
I've personally outperformed the S&P 500 by a decent margin over the past couple of years for client accounts, and my exposure to multiple other asset classes like REITs and commodities (in substantial percentages at times) are largely responsible for that.
One thing I very sure of....
Yale wasn't buying a double short fund when the market tanked in September.....
Swenson would have been rebalancing, and buying beaten up asset classes...
James Stewart, who writes the Common Sense investing column for Smart Money magazine, just tackled this same subject ("A League of Their Own.") He raises the same issues that have been discussed here, then goes on to include a recommended portfolio for anyone who wants to try this at home. It's free online and is worth reading if you're interested in the subject.
Anyone interested in the Stewart article can read it here.
Just realized that picture was familiar. Walked by it many times while a student.
Thanks for the link to the Stewart article. I think this excerpt captures what I was saying in my previous comment:
"As Meyer puts it, "The most powerful tool an investor has working for him or her is diversification. True diversification allows you to build portfolios with higher returns for the same risk." While cautioning that it would be unrealistic for individual investors to match or outperform the major university endowments, Meyer, who now runs a Boston-based hedge fund whose charter investors include Harvard's endowment, endorses the goal of diversifying into a wide variety of asset classes. "Most individuals have never had true diversification," he says. "Coming close is an admirable goal."
Swensen agrees that diversification should be the "bedrock" of every investor's portfolio. "Most investors, institutional and individual, are far less diversified than they should be," he says. "They're way overcommitted to U.S. stocks and marketable securities." In his 2005 book for individual investors, "Unconventional Success," Swensen advocates much greater diversification than most investors have in their portfolios, even though he also questions their ability to match the returns of Harvard and Yale.
IF YOU HAVEN'T been following the Ivies' investment strategies over the years, you may be surprised by how Harvard and Yale allocate their endowment assets. Their portfolios are most likely radically different from yours, or from the models advocated by most financial planners, which are still heavily weighted toward traditional asset classes like stocks, bonds and cash.
Until about 20 years ago, Harvard's and Yale's portfolios looked like that too. Then, beginning in 1990, Yale, soon followed by Harvard, moved aggressively into new categories of investments. What's most striking about their portfolios today is how little they have invested in U.S. stocks and bonds, the mainstay of most individual portfolios. As of June 2006, Yale had less than 12% of its portfolio in U.S. stocks and a mere 4% in fixed income. At Harvard the portions were 17% and 19%, respectively.
So where do they put their money? Yale and Harvard divide their endowments into seven broad asset classes: domestic stocks, foreign stocks, fixed income, absolute return, private equity, real assets and cash."
Not to beat a dead horse, but as they state I think the main takeaway from the "endowment model" is widespread diversification across numerous asset classes instead of just U.S. stocks and U.S. bonds.
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