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1、T H E P O R T F O L I O Mebane T. Faber Eric W. Richardson How to Invest Like the Top Endowments and Avoid Bear Markets Faber Richardson THE IVY PORTFOLIO How to Invest Like the Top Endowments and Avoid Bear Markets Over the past twenty years, the Yale University and Harvard University endowments ha
2、ve achieved unprecedented investment success. Since 1985, the Yale University endowment returned 16.62% per year, easily surpassing the S coauthors of The Fundamental Index: A Better Way to Invest “Analysis of institutional holdings (13F analysis) is one of the most useful yet underused tools in an
3、investors research arsenal. Along with taking readers into the arcane world of endowment investing, The Ivy Portfolio provides actionable advice on how to trade alongside the top investment professionals of our time.” Justin Walters, cofounder, Bespoke Investment Group LLC A do-it-yourself guide to
4、investing like the renowned Harvard and Yale endowments. The Ivy Portfolio shows step by step how to track and mimic the investment strategies of the highly successful Harvard and Yale endowments. Using the endowment Policy Portfolios as a guide, the authors illustrate how an investor can develop a
5、strategic asset allocation using an ETF-based investment approach. The Ivy Portfolio also reveals a novel method for investors to reduce their risk through a tactical asset allocation strategy to protect them from bear markets. The book will also showcase a method to follow the smart money and piggy
6、back the top hedge funds and their stock-picking abilities. With readable, straightforward advice, The Ivy Portfolio will show investors exactly how this can be accomplished and allow them to achieve an unparalleled level of investment success in the process. With all of the uncertainty in the marke
7、ts today, The Ivy Portfolio helps the reader answer the most often asked question in investing today“What do I do?” $49.95 USA / $59.95 CAN P ra i se for T H E I V Y PORT FOL IO ( c o n t i n u e d o n b a c k f l a p ) ( c o n t i n u e d f r o m f r o n t f l a p ) ffirs.indd ivffirs.indd iv2/13/0
8、9 10:36:22 AM2/13/09 10:36:22 AM The Ivy Portfolio How to Invest Like the Top Endowments and Avoid Bear Markets Mebane T. Faber Eric W. Richardson John Wiley thank you to every one of you. flast.indd xiiflast.indd xii2/13/09 10:41:52 AM2/13/09 10:41:52 AM 1 Part One CONSTRUCTING YOUR IVY PORTFOLIO c
9、01.indd 1c01.indd 12/13/09 10:43:21 AM2/13/09 10:43:21 AM c01.indd 2c01.indd 22/13/09 10:43:21 AM2/13/09 10:43:21 AM 3 Chapter 1 The Super Endowments 16.62%. T hat fi gure is the annualized return the Yale University endow- ment has returned per year between 1985 and 2008.1 To put that number into p
10、erspective, the S therefore, the yearly returns for the indexes will look slightly different from the calendar year ending December 31 st . 2Volatility is measured as the standard deviation of yearly returns unless noted other wise. c01.indd 3c01.indd 32/13/09 10:43:21 AM2/13/09 10:43:21 AM 4 c o n
11、s t r u c t i n g y o u r i v y p o r t f o l i o Figure 1.1 shows the performance of the top two endowments (by size) versus the S in later chapters we will examine some of the behavioral biases that led the Yale trustees to make unfortunately timed decisions and how you can avoid them in your own
12、portfolio. Figure 2.1 shows the poorly performing endowment s effects on the diminished contributions to the overall revenue of the university. Once accounting for around 50% of university revenue, the endow- ment income of the 1960s and 1970s added only minimal amounts to the operating budget. As r
13、ecently as 1982, the endowment was still below the targeted purchasing power goal. Yale ended the relationship with EM we included this simplifi ed version to compare Yale s endowment to the average endowment.) Yale does not break out its investments in real assets. We have assumed an even split bet
14、ween real estate and commodities, but in reality the university has a diverse allocation of timber, oil and gas part- nerships, real estate investments, and other real assets. Compared with the average endowment, Yale has: Less stock exposure. Much less bond exposure. Much more real estate, commodit
15、ies, private equity, and hedge funds. The portfolio reaches for high returns, thus the endowment is biased towards equity, and equity - like asset classes, which total 96% of the endowment. Bonds, due to their vulnerability to infl ation, are in the Table 2.4 Average Performance of Asset Classes dur
16、ing the Worst 10 Stock Market Months 19722008 Average% Positive S to maintain librar- ies, museums, and other collections; to support teaching and research activities; and to provide ongoing support for a wide variety of other activities. Similar to the situation at Yale, the great majority of these
17、 funds carry some type of restriction directing that the funds are used for a particular purpose. The Owner s Mentality Historically, the Harvard endowment has been structured quite differ- ently from Yale s. While Yale outsources almost all of its fund management to outside managers, Harvard histor
18、ically has managed most of its money internally, somewhat resembling an in - house hedge fund that, at its peak, had about seven times as many employees looking after its investments (175) as did Yale (around 25). The early seeds of the modern endowment were planted in the early 1970s. Paul Cabot wa
19、s the treasurer for 15 years until 1974, and he oversaw growth in the endowment from about $ 200 million to over $ 1 billion. He managed the endowment as an account at his fi rm State Street Management, which was paid a tiny $ 20,000 fee for doing so. By 1974, the endowment was getting large enough
20、to create a separate structure, and Harvard incorporated its own not - for - profi t Harvard Management Company as a wholly owned sub- sidiary of the university in July of that year. This creation was to the regret of then President Derek Bok, who remarked, “ Harvard is an educational institution an
21、d has no particular skill in operating an investment company, ” ( Great Good Fortune: How Harvard Makes Its Money by Carl Vigeland ). Fortunately for Harvard s future students, he would be proven very wrong. Paul Cabot was followed as treasurer by George Putnam who decided that HMC needed a full - t
22、ime manager. Putnam promptly c03.indd 43c03.indd 432/13/09 10:58:21 AM2/13/09 10:58:21 AM 44 c o n s t r u c t i n g y o u r i v y p o r t f o l i o hired Walter Cabot, the nephew of Paul Cabot. While much of the capital was managed internally, HMC teamed up with Cambridge Associates to identify som
23、e outside managers and ended up allocat- ing about 10% of the portfolio to various fi rms (none of which were still in place 10 years later). Cabot admitted that he found it diffi cult to fi nd consistently superior managers. Cabot was one of the early pioneers exploring less effi cient markets, and
24、 his observations echo the same line of thinking as Swensens when he joined Yale a number of years later. The younger Cabot remarked, “ I would like to deliver supe- rior results for the account. How can I get them? I don t believe we can pick stocks and bonds in a fashion demonstrably to our benefi
25、 t. There is too much fl ow of information out there. I don t think we can achieve our objective through conventional methodologies of picking stocks and bonds. So how do we get to our goal? . . . Endowments are often early in new investment ideas: real estate, venture capital, private deals, and th
26、e like. They act like owners, not hired guns, who are more likely to fi ght for relative performance and thus more likely to get into trouble sooner or later. . . . We have acquired the owner s mentality as against the hired guns mentality. ” With respect to Harvard s move into less effi cient marke
27、ts, Cabot remarked, “ With this thesis in mind, we look for areas of investment mispricing. We got a notch up through securities lending, which we did very early. The problem with securities lending today is that there are too many people doing it, so they have driven down the margins and taken away
28、 most of the profi t. Then we were early in the use of derivative products. We noticed that they were being used by the bro- kerage community in managing its own assets, but not by pensions or endowments. We ve now moved into private investing in equities that are unquoted in the marketplace, such a
29、s new ventures, leveraged buy- outs, oil and gas assets and explorations, and real estate. We ve found the pricing less competitive there. We can structure a deal favorably, so the returns are better. Obviously, there is a give - up in liquidity . . . . As to venture capital, we re participants in a
30、bout sixty limited part- nerships ” ( Train, 1994 ). Today Harvard allocates its private equity portfolio to over 60 fund groups representing over 150 individual c03.indd 44c03.indd 442/13/09 10:58:21 AM2/13/09 10:58:21 AM The Harvard Endowment 45 funds and was even the fi rst institutional client o
31、f superstar venture capital fi rm Kleiner Perkins Caufi eld Foreign stocks: MSCI EAFE; Commodities: GSCI; Real Estate: REITs; Bonds: 10-year U.S. government. c04.indd 59c04.indd 592/13/09 11:23:39 AM2/13/09 11:23:39 AM 60 c o n s t r u c t i n g y o u r i v y p o r t f o l i o have been many smaller
32、 drawdowns of 5% to 10%, an investor can painfully remember the greater than 40% drawdown in the 2000 2003 bear market. The sharp 1987 crash is the second biggest drawdown over the time period, but the market recovered quickly and was hitting new highs again less than two years later. The most recen
33、t illustration is the greater than 40% drawdown that the S and shorter - term activi- ties that materialize due to sharp dislocations that involve signifi cant c04.indd 66c04.indd 662/13/09 11:23:44 AM2/13/09 11:23:44 AM Building Your Own Ivy League Portfolio 67 overshoots. ” El - Erian has a slight
34、ly more complicated portfolio, and to compare apples - to - apples we removed the private equity allocation, the special situations allocation, and we lumped the 5% infrastructure allo- cation in with real estate. (And because the portfolio only adds up to 98% for some odd reason, we allocated 2% to
35、 cash.) Table 4.9 shows both the allocations versus the Harvard and Yale allocation. Table 4.9 Various Allocations without Alternatives Harvard and Yale (average) El - Erian (no alt) Swensen (no alt) Domestic Stocks 17.29% 18.07% 30.00% Foreign Developed Stocks 13.53 18.07 15.00 Foreign Emerging Sto
36、cks 14.29 14.46 5.00 U.S. Bonds 6.77 6.02 15.00 International Bonds 2.26 10.84 TIPS 5.26 6.02 15.00 Real Estate 17.29 13.25 20.00 Commodities 23.31 13.25 Total 100.00% 100.00% 100.00% Table 4.8 El - Erian Allocation Allocation (%) U.S. Stocks 15 Foreign Developed Stocks 15 Emerging Market Stocks 12
37、Private 7 U.S. Government Bonds 5 International Bonds 9 Real Estate 6 Commodities 11 TIPS 5 Infrastructure 5 Special Opportunities 8 c04.indd 67c04.indd 672/13/09 11:23:44 AM2/13/09 11:23:44 AM 68 c o n s t r u c t i n g y o u r i v y p o r t f o l i o El - Erian comes pretty close to the endowment
38、allocation, albeit with more in foreign bonds and less in real estate and commodities (which is likely infl uenced by his expertise in managing foreign bonds at PIMCO). Swensen has the outlier portfolio with more in U.S. stocks, and curiously, more in U.S. bonds and nothing in commodities. It is str
39、ange that Swensen did not recommend commodities in either of his books, although he possibly felt that TIPS would better approxi- mate infl ation protection than would commodities. Swensen has a new edition of his book Pioneering Portfolio Management due in 2009 and hopefully he will take up the top
40、ic of commodity investing in it. TIPS act as a good hedge against infl ation and unexpected infl ation, and they have a fi xed coupon rate that is lower than Treasury bonds of similar maturity. However with TIPS the principal amount of the bonds is adjusted upward every six months based on changes i
41、n the consumer price index (CPI), a proxy for infl ation. If the United States experiences defl ation, the principal cannot decline below par at maturity. TIPS are best held in a tax - exempt account as the coupon and principal increase are taxable. If you further simplify these allocations by lumpi
42、ng TIPS in with real assets (problematic as we mentioned before), and then rounding the allo- cations, you get four very similar allocations, as shown in Table 4.10 . The biggest difference between these portfolios and most individ- ual investor portfolios is that the endowment managers have a signi
43、fi - cant amount in real assets. Why are the endowments making such a big bet on real assets? Infl ation Is the Enemy If you recall, the endowment s worst enemy is infl ation. Table 4.11 shows asset class returns divided into two periods of rising interest rates Table 4.10 Various Allocations withou
44、t Alternatives Harvard and Yale (average) Ivy El - Erian Swensen Stocks 50% 40% 50% 50% Bonds 10 20 20 15 Real Assets 40 40 30 35 Total 100% 100% 100% 100% c04.indd 68c04.indd 682/13/09 11:23:45 AM2/13/09 11:23:45 AM Building Your Own Ivy League Portfolio 69 and high infl ation (1972 1981), and fall
45、ing interest rates and low infl a- tion (1982 2007). As you can see, commodities perform much better in infl ationary environments, therefore providing a hedge during these periods. In periods of low infl ation and declining interest rates, stocks, foreign stocks, bonds, and REITs all performed bett
46、er, which makes intuitive sense because they are all capital assets. Investors derive the value of stocks and bonds by discounting their current and expected future cash fl ows by their cost of capital. For stocks these cash fl ows are current and future earnings, for bonds, they are future coupon a
47、nd principal payments. In periods of low infl ation, and thus low interest rates, the cost of capital is low, which results in higher cash fl ows for investors, for which they are willing to pay higher valua- tions. (Note: For the majority of the history of the United States the dollar was on a prec
48、ious metal exchange rate, and there was very lit- tle infl ation.) Historical returns of commodity indexes have been in - line with stocks with similar volatility, but because commodities are real assets (i.e., corn, gold, oil), they have different sources of return than stocks and bonds. Some commo
49、dities are consumable (soybeans), some are used as economic inputs (copper), while others are stores of value (gold). Unlike companies and bondholders whose cash fl ows are eroded by infl ation, commodities benefi t from higher prices in infl ationary periods. Many investors have a hard time getting comfortable with the idea of allocating a portion of their portf