Puzzled by Harvard's Weight in Emerging Market ETFs

Yesterday Paul Kedrosky (you read him, right?) posted some info about the holdings of the Harvard Management Company.

Before we get too far into this, I would remind that these are just the holdings of publicly traded stocks and funds directly managed by HMC, and not representative of the part of the fund that is hired out.

Below is the table that Paul had of the top ten holdings via filings dated December 31. That it is so heavy in narrower ETFs says a couple of things to me. Given their resources and personnel, if Harvard wanted to own more individual stocks they certainly have the wherewithal to pick more stocks. So I take the ETFs as a comment about individual stocks not having a great risk / reward proposition, which, if correct, is an interesting comment at SPX 800.

Also interesting is how heavy it is in emerging market ETFs. I'm not sure what to conclude from that. It actually seems rather unsophisticated. Perhaps it is beyond my grasp (there are plenty of smaller positions that are individual stocks) or some sort of manner of hiding out until things improve' the filing does not say how much is in cash.

Also odd is that almost 40% of the portfolio is in iShares MSCI Emerging Markets (EEM). I don't get it. In fact 72% appears to be in emerging market ETFs. I'm sure there is more to this story, but this makes a great argument for something I have been saying for a while about the endowments, which is: Read and learn as much as you can from them, but trying to emulate them is probably not a great idea.

Comments

[Stone Fox C...:]

Seems like high risk for an endowment like Harvard, but I agree with them that emerging markets are very attractive at these levels. Buying the market is a way to reduce individual stock risk that is so prevelant now. I like it, but I'm willing to take on high risk unlike what you'd expect from an endowment.

Feb 13 10:27 AM

[chrishar:]

This looks like positioning based on the premise that emerging markets will turn first, with an overweight bet on china & brazil leading that pack.

Feb 13 11:00 AM

[HarvardStudent:]

If you look at the filing from 9/30, you'll see that their holdings in EEM are actually down almost 50% over those 3 months. The really striking thing is that they had almost $2.9 billion in U.S. listed equities as of 9/30 but under $600 million as of 12/31.

Part of that is strategic, but part of that also has to do with the purpose of the endowment, i.e. providing a huge chunk of money to fund Harvard's operating budget. Things listed on the 13F are the most liquid parts of Harvard's endowment so when they need cash, they sell stock.

Feb 13 11:17 AM

[Larry House:]

Sometimes you have to be bold to make money. They are obviously betting against the developed markets for growth. The EM economies have the best prospects for growth over the coming years (with greater risk).

Feb 13 11:38 AM

[Ron Rowland:]

My interpretation is that HMC has determined it is more cost effective for them to use ETFs to gain their desired emerging markets exposure rather than hiring outside managers to to so.

The 40% EEM weighting is not 40% of their entire equity exposure, it is 40% of what they are managing in-house.

It would appear that they have decided their best use of outside managers is for domestic and developed markets exposure. Note: this appears contrary to the traditional view that it is hard to gain alpha in the large cap space so it is better to index your large cap exposure.

Feb 13 02:50 PM

[CaptKorn:]

This the first time in a long time that Harvard and I agree on anything. As for the school ethics should be a required course for all there MBA and JD students. Please don't tell me it already is.

Feb 13 03:17 PM

[Analyste de...:]

Kedrosky writes that Harvard "cut the public equity portion (outside of hedge fund holdings, etc.) of its $28.8-billion portfolio from $2.8-billion and 174 positions, to $571-million and 57 positions."

That's muddled: assets 3Q 08 were presumably $37 bln, and the public equity portion fell from 7.2% > 2%. So its not "72% of the portfolio," "72% of all equities," "72% of interntl exposure," nor even "72% of Emerging Market exposure" (because we don't know what the overall allocation by sector.)

Keep in mind we're only discussing "72% of 2% of the entire portfolio." Absent knowing the aggregate equity, foreign & EM percentages (assets, by sector) I'm not sure how or if the changing ETF portion is meaningful. Given the reported 22% decline in the portfolio (and assuming assets were not added in the period of decline), such small percentage changes might simply be rebalancing. For large instl clients, ETF positions usually serve that purpose, no?

Conclusion: I'd suggest nothing should be read into these numbers. Too many very significant unknowns!

Feb 13 04:24 PM

[Risky Move:]

The following is a quote from the link below:

"Brazilian companies eliminated 600,000 jobs in December and industrial production slumped 14.5 percent that same month. The output decline was the most since at least 1992 and exceeded all 22 forecasts in Bloomberg survey of economists."

www.bloomberg.com/apps......

Feb 14 09:10 AM

[Risky Move:]

Oops, Here is the correct link.

www.bloomberg.com/apps...

and another similar to it.

www.fxstreet.com/news/...

Feb 14 09:27 AM

[Scott479:]

While this does not give certainty to the overall allocations of their funds it does bring to mind Mohamed El-Erian's expected allocation mentioned in his book "When Markets Collide" of +- %15 US. As complex as the linked, de-linked global markets have become it is possible much more SHOULD be read into recent holdings of the Harvard Management Company.

Feb 14 09:59 AM