What Harvard Can Teach Us About Portfolio Management
By Roger Nusbaum AdvisorShares ETF Strategist
This past weekend Barron’s profiled the Harvard Management Company which manages the college’s endowment fund and its CEO Jane Mendillo. Many years ago the Harvard Endowment was a world beater under the oversight of Jack Meyer but struggled some under Mohamed El-Erian and while things have improved under Mendillo the fund has not returned to being a world beater once again.
Like many similar pools of capital, the fund allocates a large portion of its assets to illiquid investments like private equity and hedge funds but is doing less of this type of investing after a particularly bad experience in the financial crisis.
As many commenters on the Barron’s article noted, despite the complexity and sophistication of the fund it would have had better results with a 60/40 mix of the SPDR S&P 500 (NYSE:SPY) and the iShares Core Total Bond Market ETF (NYSEARCA:AGG).
Barron’s reported that the endowment has had a 1.7% annualized return over the last five years compared to 6.2% annualized for 60/40 although for ten years, Harvard came out ahead by 340 basis points annualized.
Comparisons to a 60/40 portfolio that could be constructed with just two ETFs probably miss the point. The Harvard Endowment is in the withdrawal phase of an infinite time horizon which is not what individual investors have to confront.
An endowment cannot deplete whereas the portfolio of an 85 or 90 year old investor has more flexibility in this regard.
The takeaway for advisors is the need to make sure clients truly understand their time horizons and that their portfolios are being navigated toward their time horizon versus responding to short term events like a Green Mountain Coffee (NASDAQ:GMCR) popping 30% on a deal with Coca Cola (NYSE:KO) or a stretch of poor returns for emerging markets.
Whether anyone would manage the endowment differently makes for a fun discussion but the managers of the fund have isolated a strategy that they believe is the best path for the beneficiary of the endowment, the college, and have communicated why they believe this is the best path.
Advisors who take the time to do the same with their clients will have developed much stronger relationships with their clients and enhanced the sustainability of their practice.