I just finished reading The Ivy Portfolio (How to Invest Like the Top Endowments and Avoid Bear Markets), its a gem , an easy fast read that will give you a wealth of information you can put to use fairly easily that can benefit your account tremendously. I will highlight some of the points that were important to me but I strongly suggest you get a copy of the book here.
“16.62% is the annualized return that the Yale endowment has returned per year between 1985 and 2008 versus 11.98% a year over the same time. Harvard returned over 15% a year also beating the SP500 both endowments managed this with less volatility than the SP500. Harvard and Yale endowments are the ones the book focuses on. A $100,000 investment in the Yale endowment in 1985 would be worth $4 million by June of 2008, the same investment in Harvard would be worth $3 million versus $1.5 million in the SP500. Both endowments had less volatility than the SP500.”
1. Active Management over Passive; “The top endowments rely on security selection and market timing rather than buy and hold. The big endowments actively manage almost all of their investments at approximately 95%, their active security selection skills–not asset allocation is the most important factor in determining the relative performance”. There is a huge debate nowadays about passive investing versus active investing, here is my take; 1. there is no such thing as passive investing. 2. In a roaring bull market it is really hard to outperform the SP500 while at the same time trying to protect capital (top argument), as a matter of fact the top 2 endowments under-performed the SP500 in a majority of the up years between 1985 and 2008, all that was needed to outperform was down markets which is something that we have not seen in while. Let’s see what happens when we get a correction that lasts longer than 2 days.
2. Performance: 1985- June 30th 2008 Harvard and Yale average annualized return 15.95%, volatility 9.75%, best year 36.60%, worst year 0.10%. U.S. stocks annualized return 11.98%, volatility 15.60%, best year 35.82%, worst year -17.99%. In those 24 years U.S. stocks closed positive for the year 20 out of 24 times, (83%) this is why it is hard to be a perma-bear, the odds are against you. Harvard and Yale managed to only outperform U.S. stocks 8 times during the 20 up years, in other words 12 out the 20 up years the endowment under-performed and if there was blogging and twitter back then Harvard and Yale probably would’ve taken to the wood shed every year they underperfomed the SP500. 90% of the difference in performance came in the down years. 1988 U.S. stocks down -6.98%, Harvard/Yale +2.75%, 2001 U.S. stocks -14.83%, Harvard/Yale +3.25%, 2002 U.S. stocks down -17.99, Harvard/Yale +0.10%, June 30, 2008 U.S. stocks -13.12%, Harvard/Yale +6.55%. One of the key ingredients for active management to show their skills, worth, and reason for existence is down years in U.S. stocks.
3. “The Russell 3000 index measures the performance of the largest 3000 U.S. companies, 98% of the investable U.S. equity market. 40% of the stocks had a negative return over their lifetime, 20% of stocks lost nearly all of their value, 10% of stocks recorded huge wins over 500%. 80% of the gains are a function of 20% of the stocks. Let that sink in for a second. Stock picking is not easy, especially if you want to hold something for the long term as many do but don’t have the fortitude to do it. How do you get around this? Own the Russell 3000 and take a small portion of you assets for individual stock picking if you wish. Most funds are closet indexers, they own every SP500 stock and try to outperform by putting more money in their favorite stocks. Shorten your time frame as far as holding stocks if you are an active manager, James Simons from Renaissance Capital once said that if you wrote a book that started with I Love New York it was a lot easier to try to figure out what the next 3 words were going to be than the next 12 chapters.
4. Trend following model will underperform buy and hold during a roaring bull market similar to the U.S. equity markets in the 1990’s. The ability of the timing model to add value needs to be recognized over the course of an entire business cycle, however. In other words, negative years in the markets are necessary to outperform. With so much real time data everyone is extremely focused in the short term, if their strategy does not beat the SP500 one month they want to change their strategy. Some clients end up chasing performance trying to ride the guy who’s had the hot hand in the last 3 months. Now, I’m sure some twitter gurus who will say “I killed in the 90’s, read my book on how I made 50k% etc…” But we hear about those amazing numbers of the 90’s but never get a chance to see their performance through an entire “business cycle” a.k.a 2000 and on…
5. The time to buy is when blood is running in the streets–Baron Rothschild. (mean reversion). From 1975 to 2007 the average return for all asset class was 12.97%, if the asset class was down 2 years in a row the average return increased to 23.19%, if the asset class was down 3 years in a row the average return was 33.93%. WOW. Currently there’s a couple of asset classes that are down 3 years in a row. Buying blood is a lot easier said than done, and regardless of what you hear from the twitter gurus, mean reversion works.
6. From 1984 to 1998 the buy and hold return for the DOW was 17.89%. If you missed the 10 best days those years the returns go down to 14.24%, if you missed the worst days then your returns would be 24.17% annually, if you missed both the ten best and the ten worst your returns would be 20.31%. Lesson here; defense is more important than offense, it does not seem that way in a roaring bull market but it is in an entire business cycle. The biggest rallies historically have happened in bear markets, the book provides the reader a way to avoid bear markets while still enjoying most of the upside. The goal is to avoid huge drawdowns.
In summary, diversify, diversify, diversify, avoid huge drawdowns, the books gives you a detailed way on how to do it, well worth the $10.99.
P.S. About those fees;
- In 2003 the 2 Harvard managers earned over $35 million each.
- In 2004 Harvard paid its top money managers over $100 million total.
- In 2007 the managers maid a $5.7 billion dollar gain.
- Many students and alumni had a hard time paying these managers multi million dollar salaries.
- The managers thought the school was getting a good deal for top-flight investment talent.
- The estimated total cost to manage the portfolio internally for Harvard was 0.5%.
- Meyer, Harvard’s money manager left in 2005 to launch his own hedge fund along with 30 Harvard staffers after all the backlash about his pay. Harvard pledged to invest 500 million in to his fund and pay the fund 1.25% management fee–$6.25 million and 20% of the profits…Harvard ended up paying him 10 times his salary to manage a few hundred million versus the billions he was managing at the school..
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Frank Zorrilla is the founder of Zor Capital LLC a New York based investment management firm. Our goal is superior performance, with preservation of capital as our number one priority. Zor Capital manages separate accounts (both taxable and retirement) for accredited investors and institutions. This structure gives clients access to a hedge fund like strategy while maintaining 100% control of their accounts. Managed Assets