David Swensen is the Albert Pujols of the money-management world. Over his career, Pujols, the power-hitting first baseman of the St. Louis Cardinals, boasts a freakishly low ratio of strikeouts to home runs. When baseball historians consider that statistic along with Pujols's consistently high batting average and the prodigious number of runners he has driven in, they conjure up comparisons with such legends as Lou Gehrig and Ted Williams.
Swensen is the chief investment officer of Yale University's endowment fund. From July 1984 through June 2008, Yale's endowment returned an annualized 16.6%, an average of five percentage points per year better than both Standard & Poor's 500-stock index and a balanced index holding 60% in stocks and 40% in bonds. He achieved a 40-fold multiplication of wealth with one-third less volatility than the S&P 500 and with only one down year (a 0.2% loss in the fiscal year that ended in June 1988, the period that included the crash of 1987).
Alas, even Swensen is mortal. Yale's endowment suffered terribly over the 12 months that ended last June. At press time, the school hadn't yet reported results, but we estimate that the endowment lost 25% to 30% -- not surprising, given that nearly all financial markets collapsed last year.
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Swensen, who in the bond arena seems to invest only in government securities (both the traditional and the inflation-protected sort), appears to have allocated just 4% to Treasuries, one of the few asset classes that held up during the financial crisis. A lack of financing and liquidity crushed alternative investments, such as venture capital and leveraged buyouts, longtime staples of Swensen's strategy.
Still, the endowment returned roughly 14% annualized from June 1985 through June 2009.Can individual investors learn and borrow ideas from Swensen? Mebane Faber says yes. Faber, a money manager in El Segundo, Cal., analyzed the "super endowments" of Yale and Harvard. (Harvard's endowment lost 27.3% in the fiscal year that ended June 30. It gained an annualized 13.0% from July 1984 through June 2009.) He published the results in The Ivy Portfolio (John Wiley & Sons, 2009), a book that he co-authored with colleague Eric Richardson.
The average investor can't replicate the Ivy endowment portfolios precisely. When Benjamin Franklin opined that the only certainties in life are death and taxes, he evidently wasn't thinking about university endowments. Unlike the rest of us, the funds pay no taxes and never perish. Moreover, the endowments have huge staffs and access to investments, such as private-equity partnerships and hedge funds, that are unavailable to individual investors.
Still, Faber thinks you can learn much from the endowments' ability to produce respectable risk-adjusted returns by in-vesting in assets that are chancy but don't move in sync with one another. Portfolios such as these are prepared for almost any scenario (inflation or deflation, a strong dollar or a weak dollar) and should enjoy much of the fruit of bull markets while easing the pain of bear markets.
Based on his study of the Ivy endowments, Faber has constructed a low-cost portfolio of ten ETFs and ETNs (see the box at left) that draws on the Ivies' methods of allocation, diversification and risk management. Faber recommends that you rebalance the portfolio periodically. If you're interested in adding his market-timing strategies to the mix, check out his book, or visit www.theivyportfolio.com.
YOUR PERSONAL ENDOWMENT
With a 10% position in each of these ETFs and ETNs, you'll get close to the endowment investments of some Ivy League schools.ETFSymbol% to owniShares S&P GSCI Commodity-Indexed TrustGSG10%iShares Barclays TIPS BondTIP10%PowerShares DB Commodity Index TrackingDBC10%SPDR Dow Jones International Real EstateRWX10%Vanguard Emerging Markets StockVWO10%Vanguard FTSE All-World Ex-USVEU10%Vanguard REIT IndexVNQ10%Vanguard Small CapVB10%Vanguard Total Bond MarketBND10%Vanguard Total Stock MarketVTI10%
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