Harvard and Yale 2009 Returns

There has been a lot of coverage in the media on the Harvard and Yale endowment returns for 2009 (Bloomberg, WSJ, Barron’s, NYTimes, Dealbook, CNBC, etc.).

In an earlier post I examined the performance of the endowments (estimated) versus some publicly traded asset classes, allocations, and tactical models. Below I update the post with the final numbers, and then expand a bit and see exactly what a difference this past year made.

Most commentators focus on the headline-generating losses, but take note of the following observation – Harvard and Yale were in line with stocks for 2009 (-25.95%), and beat REITs (-40.62%), commodities (-59.68%), and foreign stocks (-30.96%). They trailed US government bonds (7.10%). Even after including 2009, Harvard and Yale have beaten stocks since 1985 by over 3% with less volatility.

Below are some returns from the endowments from 1985-2008, followed by 1985-2009 (and remember these are for fiscal year ending June 30th!!):

(Data sources: Global Financial Data, Harvard and Yale Annual Reports)

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI

REITs – NAREIT

• Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes
• Harvard and Yale are announced returns for 2009
• 60/40 is the traditional 60% stocks, 40% bonds allocation
• Timing model is from my 2007 paper, Rotation is from my 2009 book.

click to enlarge

Some observations, 1985-2008:

• Harvard and Yale’s returns are highly correlated at .91, suggesting they follow similar strategies and allocations.
• Harvard and Yale beat any one asset class by roughly 3-5%.
• Harvard and Yale beat most indexed allocation models by 4-5% with similar volatility.
• Harvard and Yale are highly correlated to equity markets, as well as a diversified buy and hold including real assets.

Some observations, 1985-2009:

• Harvard and Yale’s returns are even more highly correlated at .95, suggesting they follow similar strategies and allocations.
• The bear markets of 2008/2009 knocked a full 2% off the compounded returns of the endowments.
• Harvard and Yale still beat any one asset class by roughly 3-5%.
• Harvard and Yale still beat most indexed allocation models by 3-4% with similar volatility.
• The endowments’ Sharpe Ratio took a heavy beating, knocking it down to the .6-.7 range from over 1.0. (A nice rule of thumb is that most asset classes have Sharpe Ratios of around .2, a diversified allocation is around .4, and momentum style models can get you up to .7 and .8.)
• The timing model now has a higher Sharpe Ratio than the endowments, largely due to avoiding the bear markets of 2008 and 2009. The leveraged timing model (at 2X at broker call rate) would have outperformed the endowments on an absolute and risk adjusted basis.
• The Buy and Hold allocation now has a whopping .9 correlation to the Harvard and Yale endowments.

Some comments:

What is some of the advice you give individual investors?

1. Diversify across equities, bonds, and real assets. More bonds the less risk you want.

2. Avoid taxes.

3. Avoid fees.

4. Index.

A simple portfolio we advised in the book was:

US Stocks: VTI, SPY

Foreign Stocks: VEU, EFA

Bonds: BND, AGG

Real Estate: VNQ, IYR

Commodities: GSG, DBC, LSC

We further split these allocations into 10 and 20 asset classes in the book. Next,

5. Use risk management (i.e. the timing model).

6. Seek alpha (via hedge-like mutual funds, AlphaClone, etc.)

Is the endowment model broken?

Just looking at the data, the endowment model has outperformed anything over the time period studied. The biggest criticism for the endowments is that they did not manage their risk, liquidity, and “tail-risk” enough. I think that is a fair criticism. But, in general, diversification works (most of the time).

There is a great paper coming out of a wealth management shop here in LA that deconstructs the Yale returns even further (i.e. adding value and small cap tilts, a little leverage, etc.). They find that most of the outperformance is due to, surprise, the private equity allocation. As we mentioned in the book, is the P/E game over now that there is so much competition? TBD.

Is buy and hold dead?

Anyone that makes this statement usually does not have a healthy respect for history if last year changed their opinion of buy and hold. Every asset class is great sometimes, and horrendous other times (gold, bonds, S&P 500, foreign currencies, and Argentinean stocks included). Buy and hold has never worked in periods of serious market stress. Just ask those Tulip/South Seas buy and holders.

With a diversified portfolio of world asset classes (or a 60/40 portfolio), I think you need to be able to accept a 50%+ drawdown. With a single asset class or security, you need to be able to accept an 80-100% drawdown or total loss of capital. I think using risk management via a trend-following method fits me personally.

How is the model allocated now?

You can follow timing updates here.

Comments

[oldman:]

how about a portfolio for someone in retirement at age 75?
40/60 or 20/80.

Sep 13 10:18 AM

[bottoms-up:]

I would like to see the point spread on how many of these idiots in business and finance from Harrrrvard and Yaaale got us into this giant mess in the first place.

Harvard and Yale... Smartest guys and gals in the room... Oh! Really?

Sep 13 10:49 AM

[rdd:]

I have read a few articles about Harvard/Yale as well as other endowments and pension funds.

As far as I can tell, Harvard/Yale made a lot of money during the good times but forgot to set aside enough cash to cover a one to two year drought without having to sell assets.

Personally, I plan to have my portfolio include a 5%-10% cash & ST bond position as I approach retirement so that I will be able to make the decisions on when to sell assets instead of being driven to sell into dropping markets due to a lack of cash. Ideally, stock/bond dividends and mutual fund/ETF short-term capital gains should be close to the amount needed to continuously replenish that cash position.

Sep 13 12:55 PM

[New2JC:]

Good to hear what Mr. Faber has to say, as I have read he and Eric Richardson's book X times. According to the 20 asset classes advocated in the book "the Ivy Portfolio", we should be 95% invested for the month of September, except the 5% allocated for timber should stay in cash for now. The asset class allocation and timing work well so far in 2009 due to emerging market stocks, foreign large and small stocks and foreign real estate, for individual investors. Timing is not practical for endowment funds. This is an area where the individuals have advantage over institutions.

Sep 13 02:31 PM

[Analyste de...:]

Returns? Most readers assume returns are 'what the investments generated.' WRONG.

University endowment INCLUDE donor contributions, other income & distributions in their performance (you can see why.) Contributions of what, +$1 BILLION a year sometimes?? Be very very careful when you read "endowment return" stats - don't assume these gross #s are germane to a retail investor's portfolio performance in any way, shape or form! Apples & oranges.

I ran numbers using the proxy ETFs & MFs that the author and others have suggested previously for various allocations 2006-2008. The 10/9/07-3/6/09 Great Bear Decline losses ranged -48% > -55%. For Yale (10/9/07-6/30/09), these older, unrebalanced, static allocations lost -36% > -46% (vs. the "-30%" stated recently.)

In his 12/16/08 letter, Yale President indicated -25% loss for the previous 6 months, with greater unrealized losses to appear later. I calc'd between -33% > -38% with the proxies, so they do approximate. I would also expect their pricey hedge funds managers could reduce risk & improve performance over mock-up ETF allocations from 2006!

I don't think Harvard or Yale did a good job managing risk - on the contrary, they seemed to carry the same overall risk as their asset allocation. And before we declare they "beat stocks" longer term, let's remove the billions in alumni contributions over the past 3 decades!

Sep 13 04:33 PM

[C.S. Jefferson:]

Hedging works better--just 'cause you hold an Ace, King, Queen and Jack in your hand doesn't mean you have a straight flush to win the pot.

Just 'cause you buy a bunch of lottery tickets to increase your odds doesn't mean you hit the winning numbers.

With market crashes and serious deflation risk, all asset classes collapsed last year. Even gold failed to rise and maintain above 1,000 per troy oz in the worst economic crisis we've seen!

Sep 14 12:21 AM

[Uncle Pie:]

David Swenson, who runs the investments for Yale's endowment, wrote a book called "Unconventional Success". At the time of writing, Yale had 60% of its capital invested in an asset class he calls "absolute return" which turns out to be a euphemism for hedge funds, and "private equity" which is a euphemism for leveraged buy out funds. Hedge funds and LBO funds are almost always highly leveraged, but Mr. Swenson is silent about the degree of leverage implicit in Yale's portfolio. If the "absolute return" component was leveraged 3 or 4 to one (which would be conservative for those kinds of funds) then in effect Yale's endowment had been transformed into a gigantic margin account, and margined to the max. One has to wonder then, to what degree was Yale's outperformance during the bull market due to Mr. Swenson's genius, and to what degree was it due to the leverage? We will probably never know the answer to these questions. Another question that will likely remain unanswered is: to what degree has Mr. Swenson's affinity for hedge funds and LBO funds discouraged alumni gifts and bequests to Yale's endowment?

Sep 14 12:03 PM

[Plant the s...:]

I think that having liquidity is important so that you are not forced to liquidate at exactly the wrong time especially if you hold a fair amount of illiquid investments.


On Sep 13 12:55 PM rdd wrote:

> I have read a few articles about Harvard/Yale as well as other endowments
> and pension funds.
>
> As far as I can tell, Harvard/Yale made a lot of money during the
> good times but forgot to set aside enough cash to cover a one to
> two year drought without having to sell assets.
>
> Personally, I plan to have my portfolio include a 5%-10% cash &
> ST bond position as I approach retirement so that I will be able
> to make the decisions on when to sell assets instead of being driven
> to sell into dropping markets due to a lack of cash. Ideally, stock/bond
> dividends and mutual fund/ETF short-term capital gains should be
> close to the amount needed to continuously replenish that cash position.

Sep 14 05:20 PM