Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
eye.surgeon
Posts: 456
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by eye.surgeon » Fri Mar 02, 2018 12:35 am

Interesting article. Lots of very highly paid fund managers managed to blow through a billion dollars picking stocks for their endowment fund. Their 4.4% return over the last decade makes me look like a financial genius. The S&P return over the same time period was 9.8%. They could have invested in a single S&P index fund and doubled their return.

I feel somewhat vindicated that they rejected my med school application :happy

https://www.bloomberg.com/news/articles ... eucalyptus
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

WanderingDoc
Posts: 1341
Joined: Sat Aug 05, 2017 8:21 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by WanderingDoc » Fri Mar 02, 2018 2:57 am

Interesting. What the heck were they doing investing in teak and eucalyptus? Teak produces one return every 25 years. So you'll see 0% 0% 0% ... x 24 years. ~115% year 25. Something like that. Agriculture in no way works the same as equities, and its a silly way to invest donor's funds. They should be ashamed of themselves whoever selected those "money managers".
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

User avatar
Tyrobi
Posts: 697
Joined: Thu Jun 04, 2009 12:29 pm
Location: Florida
Contact:

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Tyrobi » Fri Mar 02, 2018 3:38 am

Narvekar, who took over in 2016, has decided to shift most of Harvard’s investments to outside managers. While considering further writedowns of natural resources investments, he’s indicated that he may continue to hold some if they’re a good value now. A group of alumni from the class of 1969 recently had a suggestion for Narvekar: Invest in index funds.
Hopefully, Harvard takes that advice from the class of 1969's group of alumni.
Three-fund portfolio | "Simplicity is the master key to financial success." John C. Bogle

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 4:50 am

WanderingDoc wrote:
Fri Mar 02, 2018 2:57 am
Interesting. What the heck were they doing investing in teak and eucalyptus? Teak produces one return every 25 years. So you'll see 0% 0% 0% ... x 24 years. ~115% year 25. Something like that. Agriculture in no way works the same as equities, and its a silly way to invest donor's funds. They should be ashamed of themselves whoever selected those "money managers".
A number of large funds (such as TIAA's Real Estate annuity fund) have gone into agricultural land. UK data says long run real return about 1% pa. It's a particularly good inflation hedge. Of course the largest fortunes in Britain are partly founded on agricultural land - it's what the aristocracy and the big college endowments etc own.

On GMO's numbers, timber has outperformed S&P500 w lower volatility (at least up to 2010: 1970 to 2010 I think). Yale has done very well out of timber, I believe - we used to have a lot of threads here about investing in PCL (Plum Creek Timber) etc. Wood prices crashed after 2008 and US construction slump, but I believe they have recovered since. The state of the Chinese construction industry of course has a significant impact, but the largest single driver is probably still US housing (since wood frame is almost universal).

The inherent return of a timber portfolio is in the growth of the wood. If financial prices are high in a given year, you sell wood. If they are low, you let the wood grow. For softwood lumber that's something like 5% p.a. - that's the long run average of how much more valuable a tree is, if you delay harvesting (*until* full maturity).

Eucalyptus I am sceptical, the world has plenty of those trees (and they burn too easily). Teak? That's clever, because there's a built-in short supply. 25 years from now, with tropical deforestation, I suspect the *only* teak in the world will be either reclaimed or plantation harvested.
Last edited by Valuethinker on Fri Mar 02, 2018 5:32 am, edited 1 time in total.

inbox788
Posts: 6697
Joined: Thu Mar 15, 2012 5:24 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by inbox788 » Fri Mar 02, 2018 4:59 am

WanderingDoc wrote:
Fri Mar 02, 2018 2:57 am
Interesting. What the heck were they doing investing in teak and eucalyptus? Teak produces one return every 25 years. So you'll see 0% 0% 0% ... x 24 years. ~115% year 25. Something like that. Agriculture in no way works the same as equities, and its a silly way to invest donor's funds. They should be ashamed of themselves whoever selected those "money managers".
The whole point of investing in timber is to bet on the illiquidity bonus. I thought part of their advantage was that the university endowments had a 100 year or forever investment outlook, vs. average individuals having less than lifetime investments. Teak and eucalyptus is found in high end furniture and yatchs. It's not surprising that 10 years ago, the demand for those woods dried up (more than other timber). And until we hit another spending/splurging boom, it might not be making the fat profits. It does look like things are stabilizing and might be growing a little, so this is probably the worst time to exit. [they're buying high, selling low; is the bigger mistake getting in in the first place or getting out when the going gets tough?]

http://v-hr.com/news/blog/superyacht-re ... -november/

I didn't check dividend adjusted, but here's comparing WOOD/CUT to USO/XLE, GLD and VWO. They haven't done all that bad compared to some other somewhat similar investments.

https://finance.google.com/finance?chdn ... 2AaT3byICg

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 5:28 am

inbox788 wrote:
Fri Mar 02, 2018 4:59 am
WanderingDoc wrote:
Fri Mar 02, 2018 2:57 am
Interesting. What the heck were they doing investing in teak and eucalyptus? Teak produces one return every 25 years. So you'll see 0% 0% 0% ... x 24 years. ~115% year 25. Something like that. Agriculture in no way works the same as equities, and its a silly way to invest donor's funds. They should be ashamed of themselves whoever selected those "money managers".
The whole point of investing in timber is to bet on the illiquidity bonus. I thought part of their advantage was that the university endowments had a 100 year or forever investment outlook, vs. average individuals having less than lifetime investments. Teak and eucalyptus is found in high end furniture and yatchs. It's not surprising that 10 years ago, the demand for those woods dried up (more than other timber). And until we hit another spending/splurging boom, it might not be making the fat profits. It does look like things are stabilizing and might be growing a little, so this is probably the worst time to exit. [they're buying high, selling low; is the bigger mistake getting in in the first place or getting out when the going gets tough?]

http://v-hr.com/news/blog/superyacht-re ... -november/

I didn't check dividend adjusted, but here's comparing WOOD/CUT to USO/XLE, GLD and VWO. They haven't done all that bad compared to some other somewhat similar investments.

https://finance.google.com/finance?chdn ... 2AaT3byICg
Teak is also the subject of massive deforestation. There will be a supply shortage - we will run out of wild teak to plunder. Remember that North Sea cod, the staple of English fish & chips, became an endangered species! In a couple of decades, there will be reclaimed teak & teak from plantations, and nothing else. There's also significant Chinese demand - it's used in high end furniture and flooring, not just yachts ;-).

Eucalyptus grows much more widely. It's used in biofuel (don't get me started). And in making paper (again, don't)-- cut in Tasmania. It's been used as a decorative plant in North America, and that turns out to be a disaster. Forest fire is a natural part of the life cycle of eucalyptus in Australia. Thus the tree is actually evolved to intensify and spread forest fires.

Jeremy Grantham of GMO has been talking about timber for literally, decades. Swensen mentions it. Yale Endowment and Harvard Endowment were early and successful investors I believe - mostly or wholly North American softwoods & hardwoods on private timber land*. However the easy money is probably made, because once big pools of capital start to enter, prices rise to accommodate that. If I was on the Board of a major endowment I'd certainly be asking the question of whether we should be in it, however current market conditions will matter.

* there are huge governance issues in emerging markets with timber. In particular indigenous native land rights, but not only. Timber monocultures, especially in tropical areas, are ecological disaster zones. Just like rubber plantations in Malaysia and Indonesia. And palm oil will turn out to have been one of the great environmental crimes of the late 20th/ early 21st century.

If I was an endowment, I'd be very careful who I went into timber partnership with, and where, in tropical countries. It could really come back to bite.

RadAudit
Posts: 3648
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by RadAudit » Fri Mar 02, 2018 7:14 am

eye.surgeon wrote:
Fri Mar 02, 2018 12:35 am
Their 4.4% return over the last decade makes me look like a financial genius.
+1

I think I tied with Yale's returns.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

User avatar
F150HD
Posts: 2566
Joined: Fri Sep 18, 2015 7:49 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by F150HD » Fri Mar 02, 2018 7:31 am

This topic seems to regularly pop up in the news. Here's one from 2011

How Harvard Beats The Market, and How You Can Too

From 2001 through 2010 — a period known as the lost decade — the average annual return of the S&P 500, by some measures,was only about 1.7 percent. But while the S&P 500 languished, the Harvard University endowment achieved an average annual return of about 7 percent during the same period.
Long is the way and hard, that out of Hell leads up to light.

22twain
Posts: 2183
Joined: Thu May 10, 2012 5:42 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by 22twain » Fri Mar 02, 2018 7:49 am

WanderingDoc wrote:
Fri Mar 02, 2018 2:57 am
Teak produces one return every 25 years.
Perhaps one could think of it as a teak ladder? :twisted:
My investing princiPLEs do not include absolutely preserving princiPAL.

User avatar
sunnywindy
Posts: 441
Joined: Sat Jan 18, 2014 4:42 pm
Location: Wilmington, NC

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by sunnywindy » Fri Mar 02, 2018 7:59 am

Harvard has so much money that they have become sloppy and take dumb risks.
Powered by chocolate!

AntsOnTheMarch
Posts: 610
Joined: Mon May 29, 2017 5:47 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by AntsOnTheMarch » Fri Mar 02, 2018 8:07 am

It even lagged the simplest approach: Investing in a market-tracking index fund holding 60 percent stocks and 40 percent bonds, which earned an annual 6.4 percent.
I’m shocked! :shock:

Not really. :twisted:

So many lessons in this.
Mendillo took the lead flipping U.S. timberland in the 1990s, delivering substantial profits when she worked for then-endowment chief Jack Meyer. Harvard similarly scored big gains when it bought and sold timberland in New Zealand in 2003. When Mendillo returned to Harvard after managing Wellesley College’s endowment, she tried for a reprise.
But they were known for taking outsize risks, and those can cut both ways.
A group of alumni from the class of 1969 recently had a suggestion for Narvekar: Invest in index funds.

thepoorswiss
Posts: 9
Joined: Tue Nov 14, 2017 7:56 am
Location: Switzerland
Contact:

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by thepoorswiss » Fri Mar 02, 2018 8:51 am

Very interesting!

This shows one more time that index funds are the way to go :)
And makes me feel better about my returns.
The Poor Swiss blog - https://thepoorswiss.com - Personal finance in Switzerland

LeSpy
Posts: 38
Joined: Wed Aug 09, 2017 2:56 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by LeSpy » Fri Mar 02, 2018 9:07 am

I think corruption is also a factor. The managers of the fund get eventual kickbacks for allowing wall street firms to sell their investment ideas/products to the fund.

https://www.nakedcapitalism.com/2013/07 ... pound.html

GCD
Posts: 1003
Joined: Tue Sep 26, 2017 7:11 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by GCD » Fri Mar 02, 2018 9:24 am

I don't have a link for this, just my dad's story. He was a University of Chicago alum and teaching economics in the Chicago City College system in the early 1970's. Somewhere in there the U of C decided to invest either their pension fund or endowment in index funds through Vanguard. He heard about it, looked into it, and became a BH. He talked to me about Vanguard and index investing before I was out of middle school.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 10:17 am

LeSpy wrote:
Fri Mar 02, 2018 9:07 am
I think corruption is also a factor. The managers of the fund get eventual kickbacks for allowing wall street firms to sell their investment ideas/products to the fund.

https://www.nakedcapitalism.com/2013/07 ... pound.html
If there is corruption then someone will probably go to prison.

But I don't see corruption in this article? I remember it at the time.

What I see is that Larry Summers:

- is the kind of person who throws out lots of ideas (some of genius, some absolutely dangerous)
- also knows how to make those happen
- thinks he is always right

That's not corruption, that's just a gambler who got too much influence. And note he left in 2006.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 10:23 am

eye.surgeon wrote:
Fri Mar 02, 2018 12:35 am
Interesting article. Lots of very highly paid fund managers managed to blow through a billion dollars picking stocks for their endowment fund. Their 4.4% return over the last decade makes me look like a financial genius. The S&P return over the same time period was 9.8%. They could have invested in a single S&P index fund and doubled their return.

I feel somewhat vindicated that they rejected my med school application :happy

https://www.bloomberg.com/news/articles ... eucalyptus
BUT

move the endpoints, they will look smarter.

We are 10 years into a bull market which began in March 2009. Any equity index investment looks good. If you bought US equity index, you more or less tripled your money.

You can read David Swensen and, for example, Ontario Teacher's Pension Fund (around $80bn, and a thought leader in the industry) about why returns from equities and bonds going forward are likely to be a lot lower.

Thus, the push into alternatives. But what Yale grasped (very early) and OTTP grasped, is that there is big leakage in terms of management fees and carried interest (performance fees). Swensen goes into some detail how he picks superior managers-- but one would still feel there is some secret special sauce.

So the real question for Harvard is NOT that they deviated from Equity/ Bond index funds. It's that they did so, and was it worth that cost? Did it work?

We would say no, although you've have to have done some fairly sophisticated analysis (Sharpe ratios, Sortino ratios etc) to see whether there was excess return per unit risk.

If the chosen strategies produced lower returns, but also lower risk, then they were not necessarily the wrong ones. We also have to strip out Summers and his swaps, etc. Summers really was a disaster, left in 2006, but I don't know how long those swaps lasted for-- their impact on performance.

It's a bit like International v. US equities. You could say, based on 2008-18, that the only investment you needed was a US Total Index Fund. But that is not considering diversification.

it might be in a future period that you get better results with International Equities. Or Real Estate. Or whatever. That's the nature of diversification.

Whakamole
Posts: 1097
Joined: Wed Jan 13, 2016 9:59 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Whakamole » Fri Mar 02, 2018 10:29 am

Valuethinker wrote:
Fri Mar 02, 2018 5:28 am
Teak is also the subject of massive deforestation. There will be a supply shortage - we will run out of wild teak to plunder. Remember that North Sea cod, the staple of English fish & chips, became an endangered species! In a couple of decades, there will be reclaimed teak & teak from plantations, and nothing else. There's also significant Chinese demand - it's used in high end furniture and flooring, not just yachts ;-).
There was a thread here not long ago about how the younger set were no longer interested in "brown furniture", that is, expensive high-quality wood furniture. There may not be much teak in 25 years but there may not be much demand for it either.

JBTX
Posts: 5750
Joined: Wed Jul 26, 2017 12:46 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by JBTX » Fri Mar 02, 2018 10:49 am

Valuethinker wrote:
Fri Mar 02, 2018 10:23 am
eye.surgeon wrote:
Fri Mar 02, 2018 12:35 am
Interesting article. Lots of very highly paid fund managers managed to blow through a billion dollars picking stocks for their endowment fund. Their 4.4% return over the last decade makes me look like a financial genius. The S&P return over the same time period was 9.8%. They could have invested in a single S&P index fund and doubled their return.

I feel somewhat vindicated that they rejected my med school application :happy

https://www.bloomberg.com/news/articles ... eucalyptus
BUT

move the endpoints, they will look smarter.

We are 10 years into a bull market which began in March 2009. Any equity index investment looks good. If you bought US equity index, you more or less tripled your money.

You can read David Swensen and, for example, Ontario Teacher's Pension Fund (around $80bn, and a thought leader in the industry) about why returns from equities and bonds going forward are likely to be a lot lower.

Thus, the push into alternatives. But what Yale grasped (very early) and OTTP grasped, is that there is big leakage in terms of management fees and carried interest (performance fees). Swensen goes into some detail how he picks superior managers-- but one would still feel there is some secret special sauce.

So the real question for Harvard is NOT that they deviated from Equity/ Bond index funds. It's that they did so, and was it worth that cost? Did it work?

We would say no, although you've have to have done some fairly sophisticated analysis (Sharpe ratios, Sortino ratios etc) to see whether there was excess return per unit risk.

If the chosen strategies produced lower returns, but also lower risk, then they were not necessarily the wrong ones. We also have to strip out Summers and his swaps, etc. Summers really was a disaster, left in 2006, but I don't know how long those swaps lasted for-- their impact on performance.

It's a bit like International v. US equities. You could say, based on 2008-18, that the only investment you needed was a US Total Index Fund. But that is not considering diversification.

it might be in a future period that you get better results with International Equities. Or Real Estate. Or whatever. That's the nature of diversification.
It may very well be that these guys didn’t provide sufficient returns for what they are paid, but when I see these threads, as well as hedge fund threads comparing stock and bond index funding to these portfolios to me it is apples and oranges. Of course during a period of low or decreasing interest rates and a raging bull market other investments will likely compare poorly. As pointed out, the comparison from 2000-2010 looked a lot different.

It is the problem for investment managers who truly try to diversify across lots of different asset classes. Inevitably they will be measured against the highest performing classes.

Seems to me if you make these kind of bets they are Multi-decade long endeavors. The next 10 years may look a lot different. But you have to be willing to accept sub par returns during certain cycles.

I have no educated opinion whether these were good investments for the long term or not. I know little to nothing about them.

User avatar
Topic Author
eye.surgeon
Posts: 456
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by eye.surgeon » Fri Mar 02, 2018 11:39 am

Valuethinker wrote:
Fri Mar 02, 2018 10:23 am
eye.surgeon wrote:
Fri Mar 02, 2018 12:35 am
Interesting article. Lots of very highly paid fund managers managed to blow through a billion dollars picking stocks for their endowment fund. Their 4.4% return over the last decade makes me look like a financial genius. The S&P return over the same time period was 9.8%. They could have invested in a single S&P index fund and doubled their return.

I feel somewhat vindicated that they rejected my med school application :happy

https://www.bloomberg.com/news/articles ... eucalyptus
BUT

move the endpoints, they will look smarter.

We are 10 years into a bull market which began in March 2009. Any equity index investment looks good. If you bought US equity index, you more or less tripled your money.

You can read David Swensen and, for example, Ontario Teacher's Pension Fund (around $80bn, and a thought leader in the industry) about why returns from equities and bonds going forward are likely to be a lot lower.

Thus, the push into alternatives. But what Yale grasped (very early) and OTTP grasped, is that there is big leakage in terms of management fees and carried interest (performance fees). Swensen goes into some detail how he picks superior managers-- but one would still feel there is some secret special sauce.

So the real question for Harvard is NOT that they deviated from Equity/ Bond index funds. It's that they did so, and was it worth that cost? Did it work?

We would say no, although you've have to have done some fairly sophisticated analysis (Sharpe ratios, Sortino ratios etc) to see whether there was excess return per unit risk.

If the chosen strategies produced lower returns, but also lower risk, then they were not necessarily the wrong ones. We also have to strip out Summers and his swaps, etc. Summers really was a disaster, left in 2006, but I don't know how long those swaps lasted for-- their impact on performance.

It's a bit like International v. US equities. You could say, based on 2008-18, that the only investment you needed was a US Total Index Fund. But that is not considering diversification.

it might be in a future period that you get better results with International Equities. Or Real Estate. Or whatever. That's the nature of diversification.
Seems to me their long-game time frame makes indexing even more compelling, not less. Sure the article cherry-picks the last decade S&P to compare, but is there any doubt that the results would be different over 100 years? Has the Harvard endowment discovered the key to beating the market over generations? I highly doubt it.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

LarryAllen
Posts: 1142
Joined: Fri Apr 22, 2016 9:41 am
Location: State of Confusion

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by LarryAllen » Fri Mar 02, 2018 11:45 am

Maybe Harvard did great!? Maybe they have paired their risk down extremely low so this return is great!? It seems silly for people to compare return v. return without considering one's risk exposure which is something 99.9% of the people don't fully understand anyway.

LeSpy
Posts: 38
Joined: Wed Aug 09, 2017 2:56 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by LeSpy » Fri Mar 02, 2018 11:47 am

Valuethinker wrote:
Fri Mar 02, 2018 10:17 am
LeSpy wrote:
Fri Mar 02, 2018 9:07 am
I think corruption is also a factor. The managers of the fund get eventual kickbacks for allowing wall street firms to sell their investment ideas/products to the fund.

https://www.nakedcapitalism.com/2013/07 ... pound.html
If there is corruption then someone will probably go to prison.

But I don't see corruption in this article? I remember it at the time.

What I see is that Larry Summers:

- is the kind of person who throws out lots of ideas (some of genius, some absolutely dangerous)
- also knows how to make those happen
- thinks he is always right

That's not corruption, that's just a gambler who got too much influence. And note he left in 2006.
Ok, I may have been thinking of another pension fund....I think it was CALPERS.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 11:54 am

Whakamole wrote:
Fri Mar 02, 2018 10:29 am
Valuethinker wrote:
Fri Mar 02, 2018 5:28 am
Teak is also the subject of massive deforestation. There will be a supply shortage - we will run out of wild teak to plunder. Remember that North Sea cod, the staple of English fish & chips, became an endangered species! In a couple of decades, there will be reclaimed teak & teak from plantations, and nothing else. There's also significant Chinese demand - it's used in high end furniture and flooring, not just yachts ;-).
There was a thread here not long ago about how the younger set were no longer interested in "brown furniture", that is, expensive high-quality wood furniture. There may not be much teak in 25 years but there may not be much demand for it either.
The US, and developed world demand, will probably be a rounding error by then. Aging demographics, we won't be buying much new furniture.

The demand will be the newly affluent in emerging markets-- China, India, Vietnam etc.

And if teak becomes rare enough, then it will attract a scarcity price, and that could increase demand.

Look at the Chinese demand for fine wine and rare single malt whiskeys. Or the demand for shark fin soup. The loss of 90% of the ocean's sharks (of at least some species) has not apparently totally discouraged consumption. Higher price due to declining stocks has simply increased the appetite of some, as a form of conspicuous consumption.

What *is* possible is a global revulsion against logging old growth forest - growth in global environmentalism. That's always possible. It's behind the growth in the use of bamboo for flooring, furniture etc-- it's totally sustainable.

But down the lake from my relatives is a c. $10m cottage (this is in Ontario, such is no longer as unlikely as you might imagine). The architect made a special effort to make the complex fit into the surrounding landscape, it's very well done. And the dock? Lo and behold it is made of a rare Brazilian forest wood that does not decay if immersed in water.

Now I am *sure* that that wood was sustainably sourced. In fact I bet it was stamped "sustainable" in the Amazon. Aren't you? :happy :? :?

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 11:55 am

LeSpy wrote:
Fri Mar 02, 2018 11:47 am
Valuethinker wrote:
Fri Mar 02, 2018 10:17 am
LeSpy wrote:
Fri Mar 02, 2018 9:07 am
I think corruption is also a factor. The managers of the fund get eventual kickbacks for allowing wall street firms to sell their investment ideas/products to the fund.

https://www.nakedcapitalism.com/2013/07 ... pound.html
If there is corruption then someone will probably go to prison.

But I don't see corruption in this article? I remember it at the time.

What I see is that Larry Summers:

- is the kind of person who throws out lots of ideas (some of genius, some absolutely dangerous)
- also knows how to make those happen
- thinks he is always right

That's not corruption, that's just a gambler who got too much influence. And note he left in 2006.
Ok, I may have been thinking of another pension fund....I think it was CALPERS.
Steve Rattner, who restructured GM for the US government, was indicted. His firm was alleged to have paid off State of New York employees to get the state funds to invest in his PE funds. I don't remember the legal outcome (I think both sides settled).

User avatar
Topic Author
eye.surgeon
Posts: 456
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by eye.surgeon » Fri Mar 02, 2018 12:08 pm

LarryAllen wrote:
Fri Mar 02, 2018 11:45 am
Maybe Harvard did great!? Maybe they have paired their risk down extremely low so this return is great!? It seems silly for people to compare return v. return without considering one's risk exposure which is something 99.9% of the people don't fully understand anyway.
If you read the article it's made abundantly clear that return is not the result of some extreme risk-averse investment strategy, quite the opposite.
Last edited by eye.surgeon on Fri Mar 02, 2018 12:10 pm, edited 1 time in total.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 12:09 pm

eye.surgeon wrote:
Fri Mar 02, 2018 11:39 am
Valuethinker wrote:
Fri Mar 02, 2018 10:23 am
eye.surgeon wrote:
Fri Mar 02, 2018 12:35 am
Interesting article. Lots of very highly paid fund managers managed to blow through a billion dollars picking stocks for their endowment fund. Their 4.4% return over the last decade makes me look like a financial genius. The S&P return over the same time period was 9.8%. They could have invested in a single S&P index fund and doubled their return.

I feel somewhat vindicated that they rejected my med school application :happy

https://www.bloomberg.com/news/articles ... eucalyptus
BUT

move the endpoints, they will look smarter.

We are 10 years into a bull market which began in March 2009. Any equity index investment looks good. If you bought US equity index, you more or less tripled your money.

You can read David Swensen and, for example, Ontario Teacher's Pension Fund (around $80bn, and a thought leader in the industry) about why returns from equities and bonds going forward are likely to be a lot lower.

Thus, the push into alternatives. But what Yale grasped (very early) and OTTP grasped, is that there is big leakage in terms of management fees and carried interest (performance fees). Swensen goes into some detail how he picks superior managers-- but one would still feel there is some secret special sauce.

So the real question for Harvard is NOT that they deviated from Equity/ Bond index funds. It's that they did so, and was it worth that cost? Did it work?

We would say no, although you've have to have done some fairly sophisticated analysis (Sharpe ratios, Sortino ratios etc) to see whether there was excess return per unit risk.

If the chosen strategies produced lower returns, but also lower risk, then they were not necessarily the wrong ones. We also have to strip out Summers and his swaps, etc. Summers really was a disaster, left in 2006, but I don't know how long those swaps lasted for-- their impact on performance.

It's a bit like International v. US equities. You could say, based on 2008-18, that the only investment you needed was a US Total Index Fund. But that is not considering diversification.

it might be in a future period that you get better results with International Equities. Or Real Estate. Or whatever. That's the nature of diversification.
Seems to me their long-game time frame makes indexing even more compelling, not less. Sure the article cherry-picks the last decade S&P to compare, but is there any doubt that the results would be different over 100 years? Has the Harvard endowment discovered the key to beating the market over generations? I highly doubt it.
And yet Yale Endowment has?

Yale was early into alternatives. And have demonstrated skill at picking managers.

100 years? I can't remember from memory, but I think endowments in the US have to spend 4% of their total capital + income every year to maintain tax exempt status? Yale Endowment funds about 1/3rd of the university's operating budget, from memory.

When nominal returns are below 4% that poses a problem. But it's much worse if you think in real terms. If the real returns on bonds are essentially 0, then if you are 100% in government bonds you are going into liquidation-- losing at least 2% of value in real terms every year. (Yale discusses this again in the annual report, they reckon on a long term funds requirement growing at CPI+1% reflecting higher inflation for the university than the average consumer). OTPP has made a similar calculation.

OK then equities. But equities are unlikely to return 3% real going forward. And you have sequence of return risk.

The theme in endowment investing now is "liquidity lending". Because you can accept illiquidity, you can earn a return premium over liquid asset classes. And indeed endowments beat other alternative asset investors, historically. And yes, that should, on a gross basis, outperform US stocks. Whether it is so net of fees is a different question. OTPP has built up its own PE team to reduce the impact of the "2 & 20" fee structure in PE and infrastructure (200 basis points + 20% carried interest).

Similarly should endowments and pension funds eschew investment in commercial real estate because stocks have done better, long run? CRE has some attractive characteristics like: greater stability of income and thus of returns; greater correlation with inflation; less than 100% correlation with stocks.

Swensen himself notes that if you have only average skills at picking alternative asset managers, you should not chase alternative assets. Lots of endowments did, pre 2008, and got caught (U of Penn I think for one). And indeed, post, lots of state funds and endowments have decided to throw in the towel. However the main casualty, so far, has been hedge funds.

We can't judge Harvard's efforts simply because a well chosen 10 year average makes a US equity index better. Just as we would not refuse to make foreign stock investments simply because S&P 500 beat requisite international international indices over that time period.

After all, if I get to choose January 2000 as my start point, I can make investments in US equities look pretty bad ;-). Let alone 1968 ;-).

What this seems to show is that they gambled, and lost. But I am not at the post mortem. I don't know what bets they made.

User avatar
Toons
Posts: 13426
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Toons » Fri Mar 02, 2018 12:10 pm

Win Some ,Lose Some,,,,,Decades
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
Toons
Posts: 13426
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Toons » Fri Mar 02, 2018 12:13 pm

Wow,,,I just glanced at the top endowment funds.
I outpaced them all by my "do nothing " strategy...

:mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

LarryAllen
Posts: 1142
Joined: Fri Apr 22, 2016 9:41 am
Location: State of Confusion

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by LarryAllen » Fri Mar 02, 2018 12:17 pm

eye.surgeon wrote:
Fri Mar 02, 2018 12:08 pm
LarryAllen wrote:
Fri Mar 02, 2018 11:45 am
Maybe Harvard did great!? Maybe they have paired their risk down extremely low so this return is great!? It seems silly for people to compare return v. return without considering one's risk exposure which is something 99.9% of the people don't fully understand anyway.
If you read the article it's made abundantly clear that return is not the result of some extreme risk-averse investment strategy, quite the opposite.
Ok. I stand corrected. Harvard sucks! :)

stochastic
Posts: 53
Joined: Sun Sep 06, 2015 5:09 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by stochastic » Fri Mar 02, 2018 12:32 pm

Harvard's endowment has been pretty badly managed and is pretty much at the bottom of its peers. Certainly all the faculty I talk to there are upset about it. But I'm not sure that this is conclusive evidence for them to drop the model of alternative investments and switch to index funds. The SP 500 is not really the right benchmark, the endowments are designed to be less risky than that and indeed in 2008 the major endowments fell 20-30% rather than 40-50% so should more properly be compared to 60/40 AA or something like that. On that basis Harvard still looks quite poor but Yale, Princeton, MIT etc did ok over the last decade. And they did much better in the 2001 market downturn.

folkher0
Posts: 104
Joined: Fri Dec 09, 2016 2:48 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by folkher0 » Fri Mar 02, 2018 12:36 pm

Seems to me that the endowment of a research University would have very different goals and timeframes than the average boglehead saving for retirement. Even other large institutional investors such as state pension funds have shorter timeframes than Harvard, which essentially needs to plan for infinity. I am sure that in addition to teak and eucalyptus they have an enormous allocation to more traditional stocks/bonds/funds. They probably have hundreds of other investments that I am not even able to contemplate.

We can all pat ourselves on the back that for the last 10 years we beat Harvard with a target date fund. In 300 years, I'm sure that the endowment will be just fine.

User avatar
Nate79
Posts: 5312
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Nate79 » Fri Mar 02, 2018 12:59 pm

Of course the endowment doesn't invest 100% in US stocks, neither do most BH's. So comparison to S&P500 is not correct. Second, they are not lump sum investing at the beginning of the time period but have inflows and outflows of money. This is also very different than BH who may be periodically investing in a 401k. So direct comparisons are not so easy.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 1:25 pm

folkher0 wrote:
Fri Mar 02, 2018 12:36 pm
Seems to me that the endowment of a research University would have very different goals and timeframes than the average boglehead saving for retirement. Even other large institutional investors such as state pension funds have shorter timeframes than Harvard, which essentially needs to plan for infinity. I am sure that in addition to teak and eucalyptus they have an enormous allocation to more traditional stocks/bonds/funds. They probably have hundreds of other investments that I am not even able to contemplate.

We can all pat ourselves on the back that for the last 10 years we beat Harvard with a target date fund. In 300 years, I'm sure that the endowment will be just fine.
The richest college in the UK, Trinity College at Cambridge University, some something like £1.1bn (David Swensen is an adviser).

The college is over 400 years old - they made their money in property (real estate). Holding both agricultural land locally (including what is now Cambridge Science Park) and commercial freeholds in London and other places.

John Maynard Keynes, one of the 20th century's greatest economists, ran his Cambridge College's investment fund. He was highly speculative. At one point he had to take delivery on wheat investments he had made-- filling the college basements!

He had a near miss, and nearly lost the lot. After that, he rethought his approach, and became very value oriented. Handily beating the stock market. However it has been pointed out that insider trading was not illegal in those days (1930s) and as a Master at a Cambridge College, there would have been many alumni and parents with important information about companies.

https://www.maynardkeynes.org/keynes-the-investor.html

http://www.chrisleithner.ca/newsletter/ ... letter.pdf

Keynes became first bursar of King’s in 1924, taking on responsibility for the college’s financial well being. He decided to concentrate all of the college’s resources over which he had discretion into a fund called the Chest. He intended using his trading and investing skills to considerably increase the Chest Fund’s value.
...
His investing philosophy changed over time as Keynes began to doubt his initial belief that he could profit from his broad understanding of economic cycles. He grew to favour making large investments in individual businesses; Keynes was a logical man and individual businesses had balance sheets he could study and they sold products or services whose value he believed he could assess objectively.

Keynes spent half an hour each day on stock market research – in the morning, still in bed – studying company reports, reading the financial sections of the newspapers and speaking to his various brokers by telephone.

The Chest’s initial capital was £30,000. By the time Keynes died in 1946 the fund had grown to £380,000 – an annual compounding rate of just over 12 per cent. This might not seem very remarkable but for the facts that:

This performance was achieved during a period that encompassed both the crash of 1929 and the build up to World War Two, both of which proved disastrous for British stocks.
In the same period of time, the British stock market fell 15 per cent.
The growth in the value of the Chest Fund was entirely due to capital appreciation. There was no dividend reinvestment because Keynes spent all of the dividends on the college. He believed the fund was there to provide money for the college and was scornful of the way other Cambridge colleges managed their finances, referring to them as “savings banks”.
The performance of Keynes’s fund from 1927 to 1946 is shown below. During these years the Chest grew at an annual compounding rate of 9.1 per cent while the general British stock market fell at an annual compounding rate of slightly under 1 per cent.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 1:34 pm

folkher0 wrote:
Fri Mar 02, 2018 12:36 pm
Seems to me that the endowment of a research University would have very different goals and timeframes than the average boglehead saving for retirement. Even other large institutional investors such as state pension funds have shorter timeframes than Harvard, which essentially needs to plan for infinity. I am sure that in addition to teak and eucalyptus they have an enormous allocation to more traditional stocks/bonds/funds. They probably have hundreds of other investments that I am not even able to contemplate.

We can all pat ourselves on the back that for the last 10 years we beat Harvard with a target date fund. In 300 years, I'm sure that the endowment will be just fine.
A couple of decades' of bad investment performance, or one or two rash managers, can destroy the legacy. I keep thinking of Summers and his swap transactions.

That's happened to fortunes before.

The main lesson for the Trustees is to be well diversified, and to properly assess the risk of things going wrong.

The long run enemy is inflation, which destroys the purchasing power of assets. The short run risk is of leveraged speculation, in whatever form, hitting the periodic ructions in financial markets. From the perspective of Financial History, neither 1929-1939, 1968-1980 nor 2008-09 are that unusual. The UK stock market dropped c. 80% in real terms (total return basis) 1972-74. And there are endless Emerging Markets that dropped to zero, effectively (St. Petersburg post 1914, Budapest etc.).

Commercial Real Estate & Timber fall into that category of real assets, that should have long term characteristics protecting against inflation. If investors avoid excessive leverage, they should be able to ride the inevitable busts of the sectors.

TIPS certainly did. Ontario Teachers PP bought so many Canadian Real Return Bonds that the government passed a rule limiting the holdings of any one investor (to about 15% I think) of each issue.

Then they went and bought TIPS at 3.5% real yields. Accepting the USD currency risk but locking in attractive real returns.

Good times.

WhiteMaxima
Posts: 2087
Joined: Thu May 19, 2016 5:04 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by WhiteMaxima » Fri Mar 02, 2018 1:39 pm

Why doesn't Havard chose 3 fund folio? Do they think they are smarter than market?

Dominic
Posts: 211
Joined: Sat Jul 02, 2016 11:36 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Dominic » Fri Mar 02, 2018 2:09 pm

On one hand, I get it. The three-fund portfolio that's good enough for most Bogleheads isn't good enough for Harvard, because we have different needs. This is a multibillion dollar institution, and they don't want to take too much risk and lose their donations. They need to diversify past a market weighted stock portfolio plus some bond holdings.

Still, there's no reason endowments can't put most of their funds in passive portfolios (stocks and bonds, but also commodities, factor funds, market neutral funds, risk parity funds, or other alternative investments), and put the rest into private equity and private real estate and call it a day. Just own a diverse basket of asset classes, using cost-effective and evidence-based passive methods. They're wasting money and taking on unnecessary risk by diving in at the individual asset level and trying to pick winners.

The strategy I mentioned probably still would have underperformed the three fund portfolio over the last 10 years. But the last decade was a very, very good one for stocks and bonds. Endowments don't need to return the most in any given decade, but they do need to avoid losses.
Last edited by Dominic on Fri Mar 02, 2018 2:14 pm, edited 1 time in total.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by RRAAYY3 » Fri Mar 02, 2018 2:11 pm

This is people putting their ego at the forefront and trying to outsmart the market - applying logic and analytics is to an illogical market

It’s a waste of time and money. Buy the index and worry about other things.

neoptolemus412
Posts: 150
Joined: Sun Jul 28, 2013 3:54 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by neoptolemus412 » Fri Mar 02, 2018 2:22 pm

WhiteMaxima wrote:
Fri Mar 02, 2018 1:39 pm
Why doesn't Havard chose 3 fund folio? Do they think they are smarter than market?
Endowments, like pensions have the problem of diversifying risk, while maximizing returns. It's very difficult to take billions of dollars and invest it in index funds without overweighting to stocks, regions, industries, etc. I have spent a large amount of time in a major endowment funds reviewing controls, due diligence, and the operational considerations that go into investment decisions. I personally don't make such decisions, but have a decent working knowledge of the systems setup by large endowments/family offices to make investment decisions that consider the potential risks/returns of an investment.

The diversity of opportunities that need to be considered based upon an appropriate risk profile are too many to list. Some examples are investing in rare commodities, South East Asian small caps, derivatives, etc. The average investor does not have the ability, nor need to hit such markets to achieve their goals. However, an endowment does because there are only so many places to invest billions of $$$ when risk weighting your investments appropriately. It's a problem of how to navigate the Titanic vs. surfing. Both events require similar actions, bringing oneself to shore. However, the scope of surfing is way more limited and less complex than crossing the Atlantic in a huge boat.

Now, I'm not defending endowments that underperform their peer group. However, articles like this cannot present the full depth of the complexity that goes into due diligence, risk analysis, modeling, and plain old market assumptions. Granted, some of those assumptions may be wrong and the idea of investing is that within your risk profile, the winners far outweigh the losers in terms of returns. Harvard failed at this over an extended period of time, but one can only fault them in comparison to their peer group, which includes very few family offices and endowments in the world. It's a high class problem to have.

Lastly, I equate such articles as analogous to those that write 'it is harder to get a job at (walmart, sears, name random company) than it is to get into Harvard'. Statistically, this may be true, but we all know it's comparing apples to oranges.

User avatar
Noobvestor
Posts: 4767
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Noobvestor » Fri Mar 02, 2018 2:46 pm

neoptolemus412 wrote:
Fri Mar 02, 2018 2:22 pm
WhiteMaxima wrote:
Fri Mar 02, 2018 1:39 pm
Why doesn't Havard chose 3 fund folio? Do they think they are smarter than market?
Endowments, like pensions have the problem of diversifying risk, while maximizing returns. It's very difficult to take billions of dollars and invest it in index funds without overweighting to stocks, regions, industries, etc.

... The average investor does not have the ability, nor need to hit such markets to achieve their goals. However, an endowment does because there are only so many places to invest billions of $$$ when risk weighting your investments appropriately.
I guess my question is: why is over-weighting stocks an issue? And if it is, why not just add some bonds, commodities, etc...?

To break it down in practical terms: if thousands of investors can each put millions in Boglehead-type portfolios and do well, why can't one entity that has a similar aggregate total net worth do the same?

You're arguing it's just different at that scale, and it's not that I don't believe you, but I still don't understand why. If it's a 'rock the boat' scenario from a sudden influx of capital, they could just DCA over time, no?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

wrongfunds
Posts: 2161
Joined: Tue Dec 21, 2010 3:55 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by wrongfunds » Fri Mar 02, 2018 3:28 pm

Maybe Harvard did great!? Maybe they have paired their risk down extremely low so this return is great!? It seems silly for people to compare return v. return without considering one's risk exposure which is something 99.9% of the people don't fully understand anyway.
How do you quantify risk in historical context? Historical return calculations are trivial. Is there a formula which will quantify the value of the risk taken? Heck, what exactly is the mathematical definition of risk? There is mathematical definition of return. Ignore the asset classification and just treat the entire endowment as big pool of money. Only thing matters would be the return over the period. Risk taken or not taken during that time becomes pretty much irrelevant. If there is specific allocation needed, that would still be the job of the money manager to figure out.

Higher learning institutions needing to get better than "real" returns is quite amusing. We damn well know that their "revenue" year after year increase at rate which is multiple of the CPI or the inflation. Healthcare and Education as industry never need to worry about falling behind in "real" returns :-)

neoptolemus412
Posts: 150
Joined: Sun Jul 28, 2013 3:54 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by neoptolemus412 » Fri Mar 02, 2018 3:53 pm

Noobvestor wrote:
Fri Mar 02, 2018 2:46 pm
neoptolemus412 wrote:
Fri Mar 02, 2018 2:22 pm
WhiteMaxima wrote:
Fri Mar 02, 2018 1:39 pm
Why doesn't Havard chose 3 fund folio? Do they think they are smarter than market?
Endowments, like pensions have the problem of diversifying risk, while maximizing returns. It's very difficult to take billions of dollars and invest it in index funds without overweighting to stocks, regions, industries, etc.

... The average investor does not have the ability, nor need to hit such markets to achieve their goals. However, an endowment does because there are only so many places to invest billions of $$$ when risk weighting your investments appropriately.
I guess my question is: why is over-weighting stocks an issue? And if it is, why not just add some bonds, commodities, etc...?

To break it down in practical terms: if thousands of investors can each put millions in Boglehead-type portfolios and do well, why can't one entity that has a similar aggregate total net worth do the same?

You're arguing it's just different at that scale, and it's not that I don't believe you, but I still don't understand why. If it's a 'rock the boat' scenario from a sudden influx of capital, they could just DCA over time, no?
In general, endowments have certain funding requirements they need to meet both short- and long-term. That demands a return that takes into account risk b/c one can't overweight a sector/type of investment and have it all blow up their entire portfolio. If looking at a return, you have to look at a risk-free return vs. other investment options.

Some smaller endowments have moved towards a 'passive investment' strategy and increased the use of ETFs and indexed products over the past decade. However, indexing does not solve the problem of properly risk weighting a return. An indexed product is essentially a grouping of equity or debt securities that generally have a common theme. Top 500 US companies. Top US small caps. Int. term bonds. Etc. These markets have limits and pose risks. However, endowments demand a return for expenses and funding that must be met. To guarantee that return both liquid and illiquid investments must be made to ensure in 12 months university funding can be met and in 10 years the funding is there for the new dorm. When discussing investing billions, there are only so many 'good investment strategies' out there to meet short and long-term goals. Index funds may meet one return need, but they do not provide an answer to proper diversification across a multitude of asset classes.

Now, the real issue in this article is 'can anyone produce alpha over an extended period of time'. The simple answer is it's unlikely. However, David Swensen returned over 16% on average for Yale over a 20 year period. When you see results like that, human nature is to find the right CIO with the appropriate strategy. That extra return in a competitive landscape of universities allows Yale to do more in terms of growth and long-term goals than peers with an 8% return/yr from index funds. However, as always, past performance, or the performance of others, does not guarantee returns in the future. Harvard chose poorly as it underperformed its peer group, but that doesn't mean their overall thesis is wrong. CIOs have shown in the past that they can produce Alpha and in a competitive market it's worth the risk of choosing one to run your endowment than just betting the market will meet your funding needs by indexing.

nimo956
Posts: 766
Joined: Mon Feb 15, 2010 6:07 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by nimo956 » Fri Mar 02, 2018 4:06 pm

RRAAYY3 wrote:
Fri Mar 02, 2018 2:11 pm
This is people putting their ego at the forefront and trying to outsmart the market - applying logic and analytics is to an illogical market

It’s a waste of time and money. Buy the index and worry about other things.
Yes, exactly. It's not the managers' money at stake though, so what do they have to lose if they swing for the fences?
50% VTI / 50% VXUS

WhiteMaxima
Posts: 2087
Joined: Thu May 19, 2016 5:04 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by WhiteMaxima » Fri Mar 02, 2018 4:31 pm

nimo956 wrote:
Fri Mar 02, 2018 4:06 pm
RRAAYY3 wrote:
Fri Mar 02, 2018 2:11 pm
This is people putting their ego at the forefront and trying to outsmart the market - applying logic and analytics is to an illogical market

It’s a waste of time and money. Buy the index and worry about other things.
Yes, exactly. It's not the managers' money at stake though, so what do they have to lose if they swing for the fences?
50% VTI 50% VXUS forever.

rob65
Posts: 340
Joined: Mon May 09, 2016 1:30 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by rob65 » Fri Mar 02, 2018 4:36 pm

Investing $37.6 billion with a time frame of infinity is different than what individual investors do.

With $37.6 billion, you don’t have to buy an index fund, you can run your own index fund. For reference, Schwab’s total market etf SCHB has about $11.6 billion in AUM.

User avatar
Noobvestor
Posts: 4767
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Noobvestor » Fri Mar 02, 2018 4:37 pm

I'm sincerely not trying to be difficult here, and am sure you know a lot more about this than I do, but I'm still trying to understand.
neoptolemus412 wrote:
Fri Mar 02, 2018 3:53 pm
In general, endowments have certain funding requirements they need to meet both short- and long-term. That demands a return that takes into account risk b/c one can't overweight a sector/type of investment and have it all blow up their entire portfolio. If looking at a return, you have to look at a risk-free return vs. other investment options .... An indexed product is essentially a grouping of equity or debt securities that generally have a common theme. Top 500 US companies. Top US small caps. Int. term bonds. Etc. These markets have limits and pose risks.
But I don't see why a 'total world' index wouldn't solve the problem of stock sector/size weightings, for instance. And if they need more stability and predictability than stocks/bonds provide, why not hold a core of index funds then add some alternatives to balance things out?
neoptolemus412 wrote:
Fri Mar 02, 2018 3:53 pm
However, endowments demand a return for expenses and funding that must be met. To guarantee that return both liquid and illiquid investments must be made to ensure in 12 months university funding can be met and in 10 years the funding is there for the new dorm.
Non-institutional investors often invest for short, medium, and long-term goals all in one portfolio, mainly by holding stocks and bonds, the former for the long haul, and the latter to provide stability and to meet specific nominal or inflation-adjusted obligations.
neoptolemus412 wrote:
Fri Mar 02, 2018 3:53 pm
When discussing investing billions, there are only so many 'good investment strategies' out there to meet short and long-term goals. Index funds may meet one return need, but they do not provide an answer to proper diversification across a multitude of asset classes.
But again, I don't get this argument. Take my example: thousands of Bogleheads investing millions each in a blend of stock and bond index funds all do well individually, so why wouldn't they collectively if we treated them as a group proxy for a single institutional investor?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

User avatar
nisiprius
Advisory Board
Posts: 39751
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by nisiprius » Fri Mar 02, 2018 4:41 pm

folkher0 wrote:
Fri Mar 02, 2018 12:36 pm
Seems to me that the endowment of a research University would have very different goals and timeframes than the average boglehead saving for retirement.
That's what I used to think. Until it transpired in 2008-2009 that Harvard had been investing 80% of its operating cash in the endowment fund, and the crash instantly resulted in layoffs, the end of research programs, and a sudden complete halt to their construction program in Allston. Time frame of infinity, my deleted expletive.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by RRAAYY3 » Fri Mar 02, 2018 4:46 pm

WhiteMaxima wrote:
Fri Mar 02, 2018 4:31 pm
nimo956 wrote:
Fri Mar 02, 2018 4:06 pm
RRAAYY3 wrote:
Fri Mar 02, 2018 2:11 pm
This is people putting their ego at the forefront and trying to outsmart the market - applying logic and analytics is to an illogical market

It’s a waste of time and money. Buy the index and worry about other things.
Yes, exactly. It's not the managers' money at stake though, so what do they have to lose if they swing for the fences?
50% VTI 50% VXUS forever.
Yes!

User avatar
Noobvestor
Posts: 4767
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Noobvestor » Fri Mar 02, 2018 4:48 pm

rob65 wrote:
Fri Mar 02, 2018 4:36 pm
Investing $37.6 billion with a time frame of infinity is different than what individual investors do.

With $37.6 billion, you don’t have to buy an index fund, you can run your own index fund. For reference, Schwab’s total market etf SCHB has about $11.6 billion in AUM.
That's a very selective pick. Vanguard's Total Stock has 700 billion (and 500 Index has another 400 billion). Total International has 400 billion. Total AUM is over 4 trillion. If Harvard dumped their entire ~40-billion-dollar endowment into VG, it would represent less than 1% of AUM.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 4:51 pm

nisiprius wrote:
Fri Mar 02, 2018 4:41 pm
folkher0 wrote:
Fri Mar 02, 2018 12:36 pm
Seems to me that the endowment of a research University would have very different goals and timeframes than the average boglehead saving for retirement.
That's what I used to think. Until it transpired in 2008-2009 that Harvard had been investing 80% of its operating cash in the endowment fund, and the crash instantly resulted in layoffs, the end of research programs, and a sudden complete halt to their construction program in Allston. Time frame of infinity, my deleted expletive.
I don't quite understand what they had done?

Do you mean they financed 80% of the operating costs of the University from the Endowment? Yale it is about 1/3rd,

I can't remember the exact percentage, but to maintain tax exempt status an Endowment has to spend something like 4% of its Net Assets every year-- so from capital + income. If you figure in inflation, and use Yale's CPI + 1% cost inflation, for an Endowment to be standing still, then need returns of about 7% p.a. (4% + 2% inflation + 1% extra).

That's just to stand still.

You can see then why they are chasing Alternatives, and maybe chasing returns.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 4:53 pm

neoptolemus412 wrote:
Fri Mar 02, 2018 3:53 pm

Now, the real issue in this article is 'can anyone produce alpha over an extended period of time'. The simple answer is it's unlikely. However, David Swensen returned over 16% on average for Yale over a 20 year period. When you see results like that, human nature is to find the right CIO with the appropriate strategy. That extra return in a competitive landscape of universities allows Yale to do more in terms of growth and long-term goals than peers with an 8% return/yr from index funds. However, as always, past performance, or the performance of others, does not guarantee returns in the future. Harvard chose poorly as it underperformed its peer group, but that doesn't mean their overall thesis is wrong. CIOs have shown in the past that they can produce Alpha and in a competitive market it's worth the risk of choosing one to run your endowment than just betting the market will meet your funding needs by indexing.
Also, Endowments significantly outperform other types of investors like pension funds. So the table is tilted towards them somewhat.

At least in the Alternative Assets arena.

Valuethinker
Posts: 39238
Joined: Fri May 11, 2007 11:07 am

Re: Harvard blows $1Billion picking stocks, averaged 4.4% returns over last decade

Post by Valuethinker » Fri Mar 02, 2018 4:56 pm

WhiteMaxima wrote:
Fri Mar 02, 2018 1:39 pm
Why doesn't Havard chose 3 fund folio? Do they think they are smarter than market?
Not necessarily.

But the 3 fund portfolio ignores huge other asset classes:

- Commercial Real Estate
- other real assets like timber
- Infrastructure
- Private Equity
- Short only funds
- Venture Capital
- Frontier markets
- Credit funds

The universe of publicly traded assets is nothing like the whole universe of financial assets out there.

We argue here for those because the routes into Alternatives for individual investors are either non-existent, or inferior.

For example no one here would suggest investing in private label, unquoted REITs (Swensen takes you through the horrors) except TIAA RE annuity, which is structured much more like the sort of Commercial RE fund that pension funds and other institutional investors invest in.

Post Reply