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May 23, 2013 at 02:05 PM
“The Ivy Portfolio — How to Invest Like the Top Endowments and Avoid Bear Markets,” by Mebane T. Faber and Eric W. Richardson (John Wiley & Sons, 2009).
Meb Faber is a national treasure for investors and investment professionals alike. His website, The Idea Farm (www.theideafarm.com), provides thousands of dollars-worth of research for a low outlay of $19 monthly, or less if purchased yearly. Like the Energizer bunny, Meb seems to never sleep; the research he uncovers is sharp, to the point and always interesting.
Meb and Eric are both with Cambria Investment Management. Meb is the portfolio manager, and Eric is the founder and CEO.
“The Ivy Portfolio” is about the incredibly successful Harvard and Yale endowments and about how, by using the schools’ successful techniques, you may be able to minimize shocks, like the credit bubble of 2008, and maintain a kind of portfolio sanity while everyone in the world seems to have gone mad.
The authors give plenty of credit to others — Warren Buffett, David Swensen (the acknowledged master of the art of the university endowment and author of two successful books himself), and Roger Gibson and David Darst regarding asset allocation.
The mechanics of each school’s methodology are interesting. Harvard seems to run things like “an in-house hedge fund,” while Yale outsources lots and has far fewer employees devoted to the endowment than Harvard. At times, Harvard has had 175 people to Yale’s 25.
While Harvard may have started the endowment financial-management idea, Swensen — of Yale — honed it to a fine art.
I love the story of how Harvard folks got upset when some of the school’s managers received high bonuses — high meaning, in this context, in the millions of dollars. There was an outcry, even though the total expense at the time may have been less than 0.5 percent. Eventually, the manager left and started a hedge fund, to which Harvard subscribed a large sum, thus increasing its costs substantially. It’s like an out-of-town expert being better because he or she is from — you guessed it — out of town.
Here’s the thing: This is a book about how to use the techniques of the kings and queens of the college endowment world to keep your portfolios safe from the ravages of bubbles and crises. The authors know that it’s difficult to replicate investing in things exactly the way the endowments do it, so along the way, they provide reasonable alternatives. (Even Yale’s portfolio is not bulletproof. Its private equity portion was down about 23 percent in 2002, but it was up a heart-stopping 168 percent in 2000.)
But this is not about being bulletproof — only Superman is bulletproof. This is about being better, and the authors demonstrate that one can do a pretty decent job of using ETFs to replicate Yale-like returns with private equity. The final score: Yale’s average is 23.34 percent yearly, and the ETF portfolio is 20.39 percent — so a good result.
