The Investment Scientist

Posts Tagged ‘harvard endowment portfolio

Harvard University Endowment significantly increased its holding of iShare S. Korea, iShare Taiwan and iPath India in second quarter of 2009.

Table: Top 10 holdings in Harvard University Endowment’s public portfolio

Rank Names 3/31/09 (x1000sh) 6/30/09 (x1000sh) Change
1 iShares E. Mkt 8276 9712 +1436
2 iShares Brazil 3170 3294 +124
3 iShares China 3162 4178 +1016
4 iShares S. Korea 1737 4349 +2612
5 iShares S. Africa 1222 1595 373
6 iShares Taiwan 0 6836 New
7 iPath India 446 1388 +942
8 iShares Mexico 1380 570 -810
9 Vanguard E. Mkt 2289 1758 -531
10 Market Vectors Russia 1762 882 -880
Drop China Mobile 376 459 +83
Drop Stoneleigh Partners 2626 0 Sold Out

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I wrote this article in early December 2008. Amazingly, it is one of the least read in my blog. Hadwealth-preservation someone read it and followed it, he would have earned 10% return so far in 2009.

– Michael Zhuang 3/10/2009

At the moment of writing this, SPY, the exchange traded fund (ETF) for the S&P 500 index, is trading at $85.95 and the near at-the-money call option (with strike 86 and only eight days until expiration) is trading at $3.45! (A call option is the right to buy the underlying stock at the strike price. At-the-money means the option strike price is equal to the price of the underlying stock.)

The at-the-money call premium is a full 4% of the underlying index price! Historically, that number has been in the 1% to 2% range.

What does 4% premium imply?

Read the rest of this entry »

This post was written at the depth of the financial crisis. If you stuck to the Swensen Model through out the crisis, you would be ahead now. See our model portfolio.

– Michael Zhuang

Wall Street Journal headline: “Harvard Endowment Returned 8.6%”

In light of the events of the last few weeks when financial companies collapsed in rapid succession, an all-weather portfolio is what all of us need. Yale and Harvard University endowments have portfolios that do well in both good and bad times. You’d expect these smart people to know what they are doing. They do!

In any one fiscal year (ending in June) since 2000, The Yale Endowment has never had a loss. Don’t you wish you had a portfolio that could do so well? Sadly, your record is likely to be worse than that of S&P 500. Harvard’s endowment portfolio had only two years with small losses. The worst was in 2001. That was when it suffered a loss of 2.7%. Here are the details:

Table 1: Comparison of returns for Yale, Harvard, and the S&P 500

    Year Economic Cycle Yale Harvard S&P 500
    2000 Tech bubble 41% 32% 7%
    2001 Tech bubble bust 9.2% -2.7% -14.83%
    2002 Tech bubble bust 0.7% -0.5% -17.99%
    2003 8.8% 12.5% 0.25%
    2004 19.4% 21.1% 19.11%
    2005 RE bubble 22.3% 19.2% 6.32%
    2006 RE bubble 22.9% 16.7% 8.63%
    2007 RE bubble bust 28% 23% 21%
    2008 RE bubble bust 4% 8.6% -14.8%
    Average Return 17.8% 14.4% 1.6%
    Volatility 12.4% 11.3% 14.6%

How did Yale and Harvard achieve such return stability through two major cycles of boom and bust?

The answer lies in their unconventional asset allocation. The typical US investor allocates 60% to domestic equity, primarily in large-cap growth stocks, and 40% to fixed income assets. In contrast, the endowments allocate to six non-cash asset classes that have low correlation with each other. In particular, domestic equity and fixed income make up only a small percentage of the overall portfolio: see Table 2 below. This broad diversification across weakly correlated asset classes is the primary reason why the endowment portfolios did well in both boom and bust times. (I will discuss secondary reasons in the future.)

Table 2: Asset allocations of Yale and Harvard endowments

Asset Classes Domestic Equity Absolute Return Foreign Equity Private Equity Real Assets Fixed Income Cash
Yale 11% 23.3% 14.1% 18.7% 27.1% 4% 1.9%
Harvard 12% 18% 22.% 11% 26% 16% -5%

Both endowments allocate over 25% to real assets, such as real estate and basic materials. This allocation seeks to protect against the double threat of a weak dollar and inflation.

Chart: Evolution of Yale Endowment asset allocation

As the chart above shows, Yale Endowment significantly increased its exposure to real assets in the last three years. Average investors like you and me would be well-served to heed the unspoken message of these intelligently-managed endowments. And now for your take-home lesson:

1. Broadly diversify

2. Hedge against inflation and the weak dollar.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.

You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]

Twitter: @mzhuang

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