Yes, You Can Invest Like Harvard

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

For a period of more than 20 years stretching back into the mid-1980s, university endowments seemed blessed by fairy dust. The top three U.S. university endowments — Yale, Harvard and Stanford — consistently returned more than 15% per year over that period.

That changed in 2008, when the top university endowments plummeted by 25% to 30%. The combined losses for Harvard, Yale, Stanford and Princeton reached nearly $23 billion in the 12 months ended June 30, 2009.

Critics pounced, mocking the Ivy League propeller heads and declared that endowment model investing was dead. But despite the flack it caught in 2008, the endowment model has held up surprisingly well. And most importantly, it’s a model you can easily use to boost the investment returns in your own portfolio.

The ‘Super Endowments’ Bounce Back

Last week, the top endowments announced their investment returns for the fiscal year ended June 30.

The Harvard endowment gained 11.3% in the year through June, trailing rival Yale’s 12.5% return. Stanford was sandwiched between its East Coast rivals with a gain of 12.1%.

That marks the first year that endowment gains matched their long-term rates of return.

But despite the financial meltdown of 2008, over time, the returns on the top endowments have continued to trounce the returns of the broader U.S. stock market.

For the past 10 years, the Yale endowment’s average annual return stands at around 11%. That compares with 7.1% for the S&P 500.

Put another way, Yale earned an extra $9.4 billion on its 2003 endowment of $11 billion just over the past 10 years versus what it would have been by simply investing in an S&P 500 index fund.

Yale’s David Swensen: The ‘Babe Ruth of Investing’

Top university endowments owe their success to the efforts of a single man, Yale’s David Swensen. As the Yale endowment’s chief investment officer for more than two decades, David Swensen has earned a reputation as the “Babe Ruth” of the endowment investment world.

After taking over the Yale endowment in the mid-1980s, Swensen had boasted 15.6% average annual returns through 2007 and no down years going back to 1987.

That indirectly made David Swensen one of the world’s largest philanthropists, on par with Warren Buffett and Bill Gates.

So, how did Swensen single-handedly change the rules of institutional investing?

In 1985, around the time Swensen took over, more than 80% of Yale’s endowment was invested in domestic stocks and bonds.

But Swensen, an economics PhD, observed that no asset allocation model ever actually recommended that allocation. As long as their correlation with U.S. stocks and bonds was low, adding unconventional assets to your portfolio would both reduce your risk and increase your return.

This led Yale to emphasize private equity and venture capital, real estate, hedge funds that offer long/short or absolute return strategies, raw materials and even more esoteric investments such as storage tanks, timber forests and farmland.

This approach was quickly copied by all of the top university endowments, including Harvard and Stanford.

And within a few years, Harvard’s endowment went from a traditional 65%/35% allocation between stocks and bonds to a much more diversified portfolio:


Yes, You Can Replicate Harvard’s Success…

The “catch” — at least according to Swensen — is that you have no chance of coming close to its market-trouncing results. After all, Yale can attract the top investment managers in the world.

With all due respect to Yale, I think that’s bunk.

Here’s why I believe that you can replicate the investment success of top university endowments.

First, it’s a bedrock rule of finance that asset allocation explains well over 90% of your investment returns.

In other words, it’s the big picture decision whether to invest in emerging markets or hedge funds that matters a lot more than which particular fund you invest in.

A recent study in the Journal of Wealth Management looked at whether you can replicate Yale’s results using index funds. It concluded that “consistent exposure to diversified, risk-tilted, equity oriented assets” explains a big chunk of the Yale endowment’s returns.

Second, today, there are exchange-traded funds (ETFs) that allow you to mimic the endowments’ investment strategy in your own portfolio.

At my firm, Global Guru Capital, I have been replicating Harvard’s investment strategy since 2009 through the “Ivy Plus” Investment Program which mimics the asset allocation strategy of the Harvard endowment using ETFs.

NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Publishing.

Over that time period, the “Ivy Plus” program has tracked the returns of the Harvard endowment quite closely.

This past year was no different. According to my preliminary calculations, the model “Ivy Plus” Investment Program rose 11.91% in the 12 months to June 30, besting slightly the Harvard endowment’s actual return of 11.3%. (If you would like more information on the “Ivy Plus” Investment Program, you can down load a new Special Report by clicking HERE.)

The bottom line?

Diversifying beyond a standard U.S. stock and bond portfolio into a broader range of asset classes like timber, private equity, real estate and global stocks and bonds is the real “secret” behind Harvard’s investment success.

And you can achieve those very same “Harvard-style” returns with a highly diversified-style portfolio of ETFs in your own investment portfolio.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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