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by Maz Jadallah

One of AlphaClone's most versatile features is the ability to create new fund groups around investment themes. To show how this works, we launched three new fund groups two weeks ago, each around a specific investment theme. The three groups are:

  1. Endowments: in honor of Mebane Faber's new book "The Ivy Portfolio", we created a fund group that combines five of the largest university endowments.
  2. Value Masters: combines eighteen of the world's top value investors.
  3. International: includes all hedge funds in our database but with their positions screened for just ADR holdings.

We'll be covering each group in more depth, starting this week with the Endowments Fund Group, then next week we'll cover Value Masters and finally our International fund group. For now, we present AlphaClone's Endowments Fund Group. Mebane Faber makes a convincing case in his new book "The Ivy Portfolio" that if diversification across asset classes is what you seek as an investor, you'd be hard pressed to find a better template than the stock portfolios of university "super endowments". Indeed a look at the backtested performance of AlphaClone's Endowments group is very instructive. The five endowments in the group are:

  1. Harvard
  2. Yale
  3. Princeton
  4. University of Texas
  5. Stanford

Let's take a look at the group's Top Three Holdings Clone. Remember that this is a clone, which means we're investing quarterly in the underlying holdings at the time they are disclosed publicly and our Top Three Holdings strategy means we're investing quarterly in the three largest holdings from each fund (endowment in this case) in the group.The first thing that is noticeable right away is that 12 of the 15 holdings are in either ETFs or REITs, making this clone a great candidate for investors who desire index investing. Second, to drive our point about diversification home, the 15 holdings are spread out across 9 different world geographies and/or industry sectors with little overlap.

Emerging Markets (EEM*, VWO)
3
US (IVV, SPY)
2
Europe (NYSEARCA:EFA)*
2
REITs (AKR, DEI)
2
Communications (T, VZ)
2
Global (NYSEARCA:IOO)
1
Brazil (NYSEARCA:EWZ)
1
China (NYSEARCA:FXI)
1
Oil (NYSE:XOM)
1
Total # of holdings
15
*held by more than one endowment - note the clone's holdings will change on 5/22/09, our next rebalance date.


How does the clone perform? Since 2000, the clone has returned an annualized 9.7% versus the S&P 500TR index which has returned a negative 3.6% annualized. Here are the results across various performance and risk measures:

1/3/2000 to 5/1/2009
Clone
S&P 500
Annualized Return
9.70%
-3.60%
Total Return
137.50%
-28.9%
Volatility
19%
16.2%
Max Drawdown
-53.70%
-50.9%
Sharpe (4%)
0.30
(0.50)


Finally, here is what the clone holds currently.

1
EEM
iShares MSCI Emerging Markets Index
Harvard University
2
FXI
iShares FTSE/Xinhua China 25 Index
Harvard University
3
EWZ
iShares MSCI Brazil Index
Harvard University
4
XOM
Exxon Mobil Corp
Princeton University
5
T
AT&T Inc
Princeton University
6
VZ
Verizon Communications Inc
Princeton University
7
EFA
iShares MSCI EAFE Index
Stanford University
8
EEM
iShares MSCI Emerging Markets Index
Stanford University
9
IVV
iShares S&P 500 Index
Stanford University
10
VWO
Vanguard Emerging Markets Stock ETF
University of Texas
11
IOO
iShares S&P Global 100 Index
University of Texas
12
SPY
SPDRs
University of Texas
13
DEI
Douglas Emmett Inc
Yale University
14
AKR
Acadia Realty Trust
Yale University
15
EFA
iShares MSCI EAFE Index
Yale University
One of the challanges of matching the asset allocation strategies of top endowments is that for most investors there is no investable proxy for some of the asset classes in which endowments invest, such as private equity, private partnerships and hedge funds. The clones above are based on an endowment's equity holdings only. One interesting thought that we think is worth at least another article is to take a clone based on a pure hedge fund theme (e.g., Tiger Cubs) and combine it with the above Endowment investment themes to form a more "complete" Endowment clone.

Part II, Part III

Source: Investment Fund Clones Part I: University Endowments