With the S&P 500 now up 12.52% since Jan. 1, it has been a strong start to 2012. Yet it’s also worth examining how that performance compares with what you would have earned by investing in other, less popular stock markets or asset classes.
The truth may surprise you. It turns out that the U.S. markets’ recent performance has been fairly middling compared to some of the other investment opportunities available to you. It also serves as a reminder that it’s worth expanding your investment horizons beyond the conventional mix of stocks and bonds.
At my firm, Global Guru Capital, I manage the “Ivy Plus” Investment Program, a strategy based on the asset allocation strategy of the Harvard endowment. I’ve written on the remarkable strength of this strategy before. The strategy also allows me to follow a wide range of markets and sectors ignored by most investors.
As you can see below, Harvard invests in a much wider range of asset classes than you probably do, including private equity, absolute return (hedge funds), real estate, and commodities.
David Swensen, head of the Yale endowment, was the first to highlight this style of investing. By expanding Yale’s investment horizons beyond a traditional mix of U.S. stocks and bonds, Swensen argued that Yale would generate better returns over the long run. Thanks to this strategy, Yale (as well as with Harvard and Stanford) has generated about a 15% annual return over the past 25 years or so. And yes, that performance includes the dotcom bust, and the financial meltdown of 2008.
Since the advent of specialized exchange-traded funds (ETFs) starting around 2008, I have been able to replicate this strategy in my clients’ personal portfolios in the “Ivy Plus” Investment Program with remarkable success.
So with that, here are the three top-performing asset classes in the “Ivy Plus” Investment Program so far in 2012 — all of which are trouncing the S&P 500 in 2012.
1. Private Equity
“Private equity” is the industry that made Mitt Romney rich. And when markets regain their mojo, this sector tends to outperform strongly the major market averages. The PowerShares Listed Private Equity (PSP) exchange-traded fund now is up 18.76% in 2012, outperforming the S&P 500 by a country mile.
The “Ivy Plus” Investment Program has a 12% allocation to PSP. It also is a current recommendation in my investment service, The Alpha Investor Letter.
2. International Real Estate
Real estate is the industry that got the U.S. economy into the mess that it is in today in the first place. Yet I bet you’d be surprised to learn that the 9% allocation to U.S. real estate has been the best-performing asset in the “Ivy Plus” Investment Programsince the start of 2011.
However, it’s the 2% sub-allocation to international real estate through the SPDR DJ Wilshire Intl Real Estate (RWX) exchange-traded fund has been the big star in 2012, rising 15.2%. This fund also has been a recommendation in The Alpha Investor Letter in the past.
3. Emerging Markets
Emerging Markets are the classic “risk on, risk off” trade. When stock markets are hot, emerging markets always leave the U.S. market in the dust. But then, when a financial crisis hits, investors head for the exits at once. Emerging markets abruptly collapse, leaving investors nursing their wounds and vowing never to come back again.
Yet that kind of behavior can cost you dearly. Over the past 10 years, emerging markets have returned an average of 12% per year. Today, the S&P 500 trades below where it was on July 16, 1999.
This year, the emerging markets are outperforming the U.S. S&P 500 yet again. The 12% allocation to the asset class in the “Ivy Plus” Investment Program” through the iShares MSCI Emerging Index Fund (EEM)is up 14.76% so far in 2012.
The Alpha Investor Letter also has a significant allocation to emerging markets, though this is through specific country bets on markets like Hong Kong, Singapore and Russia.
The bottom line?
Yes, the U.S. market has made a strong run over the past few months.
But when the bull is running, it’s far from the only game in town.
Nicholas A. Vardy
Editor, The Global Guru
P.S. Please join me for the Las Vegas Money Show, May 14-17, at Caesar’s Palace. To register, call 1-800/970-4355 and mention priority code 026655 or click here. I also encourage you to sign up for my hedge fund seminar, Wednesday, May 16, 9 a.m. – 11 a.m.