Showing posts with label Endowments. Show all posts
Showing posts with label Endowments. Show all posts

Monday, December 21, 2020

2020 Update on the Yale Endowment

Inspired by Financial Samurai's latest post, I am updating my post on the Yale Endowment. They have released preliminary results for the 2019-20 financial year (ends 30 June) and so we can update with three years of data. They returned 6.8% for the 2019-20 financial year, which is just below the S&P500's 7.5%. On the other hand, HFRI lost 0.6% and I lost 0.1% in USD terms. In the long run, since the financial crisis they have tracked the MSCI index with a little extra return and a little less volatility:

Their asset allocation continues to evolve, with domestic equity now only 2.5% and private equity now 41% of the portfolio:

Natural resources are now down to 4.5%. This is much more extreme than the typical family office portfolio, which has 49% of assets in alternatives including rela estate and commodities vs. 78% of the Yale portfolio.

Monday, November 23, 2020

Asset Allocation of Family Offices

 Here is the average asset allocation of family offices a couple of years ago according to UBS:

It's odd that they count commodities separately from alternatives. Perhaps it was used in a study about commodity investing. Here is our current allocation that was partly inspired by university endowments:

It's quite close, though we have more in commodities (=gold) and less in cash. Alternatives here includes private equity, real estate, hedge funds, futures, and art. As usual, the value of our house is not included.

Sunday, December 29, 2019

The Best Portfolio for Australia

The portfolio charts website, I wrote about before, now lets you do analysis using Australian assets, inflation etc! It turns out that the best portfolio for Australia isn't the same as the best for the US... The following table shows the average and standard deviation of real returns, the maximum drawdown, and the safe and permanent withdrawal rates (preserves capital) for a 30 year retirement horizon:

This is based on data since 1970. Based on the permanent withdrawal rate the Ivy Portfolio developed by Meb Faber is best. The 100% Aussie stocks portfolio (TSM) has a slightly higher return, but the lowest permanent withdrawal rate. So, I think Aussie investors should start to think about portfolio design from something similar to the Ivy Portfolio. It's no surprise that I have been a fan of Meb Faber and endowment style portfolios...

Using ETFs, this portfolio recommends putting 20% into each of Australian stocks, international stocks, intermediate term bonds, commodities, and REITs.

Using the build your own portfolio tool you can see what tweaking this beginning portfolio can do. For example, replacing half the commodities allocation with gold and half the bond allocation with extra international stocks, increases the return to 6.1% and the SWR and PWR to 5.2% and 4.4% with almost no increase in drawdowns.

Going to 60% stocks divided equally between Australia and the rest of the world and 10% in each of bonds, gold, commodities, and REITs, is actually quite similar in return profile to the Ivy Portfolio. The key thing is to hedge Australian stocks with international and real assets. This latter portfolio is probably going to tbe basis of my own new target portfolio.


Sunday, January 20, 2019

How Has Yale Done Since the Financial Crisis?

Just following up on Financial Independence's comment on my post linking David Svensen's 2008 lecture. How has Yale done since Svensen's lecture? It is easy to find out by checking the endowment's annual reports. Yale's financial year is from July 1st to June 30th. The graph shows Yale's total return index against the MSCI, S&P 500, and HFRI, where the others are all calculated on a July to June basis too.


Yale has performed quite well, eventually outperforming the MSCI World Index, but underperforming the S&P 500. Yale's diversification didn't help in the financial crisis. Their returns were just as negative as those of the MSCI and the S&P 500 in 2008-9. By contrast, the HFRI suffered only small losses in 2008-9. The bottom line is that Yale's returns are quite similar to an equity index.

Here is their asset allocation over the years:


Prior to 2013 they didn't report venture capital separately from buyout funds and so "Leveraged Buyouts" represents all private equity in the earlier years. Also, prior to 2009 they didn't report real estate and natural resources separately and so "natural resources" covers both. Over the years they have increased private equity and foreign stocks and reduced real estate and domestic stocks.

Thursday, January 17, 2019

David Svensen Lecture at Yale

Svensen is the manager of Yale's endowment. He also gives occasional lectures at Yale.


My investment strategy is strongly influenced by endowment investors like Svensen.

Monday, January 28, 2013

Evolution of Yale's Portfolio



A topic I haven't covered for a while - endowments. The Yale portfolio is the most dissimilar to our own portfolios of those I track. They have very little foreign equity and lots of private equity and those trends have been accentuated over recent years. Their allocations to hedge funds and domestic (US) equity have also almost halved. I have an update on Harvard's rate of returns but they are vague on portfolio allocation.

Saturday, July 02, 2011

Couldn't Buy GTAA for my Mom

I blogged that we wanted to buy shares in the Cambria GTAA ETF for my Mom among other investments we were making in the portfolio. But the bank (one of the biggest global banks) which has custody of the portfolio (they don't manage it really, we (my brother and I) do so that's why I put it this way) said that they couldn't buy the shares because a US Partnership was involved in this stock and the "security settings" blocked them from buying these shares for non-residents. I was able personally to buy shares in GTAA through Interactive Brokers. So this is weird. I contacted the GTAA portfolio manager and he thinks it's weird too and passed the info on to the relevant people. After the changes we did make - we were allowed to buy shares in the China Fund on the NYSE - the portfolio looks like this:



The rate of return for June was -1.11% overall, whereas the MSCI World Index lost 1.54%. You can see that we managed to reinvest some of the Sterling cash but not even the majority of it. We got rid of most of the USD cash and about half the Euros. We need to retain some cash to possibly pay taxes including on the capital gains on the bond funds we sold. The reinvestment in bonds is in a convertible bond fund rather than straight bonds. Otherwise we invested in a real estate fund and tried to increase holdings in non-US stocks and alternative investments. The long-run picture of asset allocation looks like this:



The breakdown is much cruder and we don't have observations for every month. The main thing to notice is the increase over time in the allocation to equities and the reduction in cash. We are now at 31% equities, which is close to where we want to be I think. The real estate share has mostly increased due to the increase in the value of my Mom's apartment. The portfolio is now more similar to the allocation in endowment portfolios. It is particularly close to the Australian Future Fund allocation and the Harvard allocation. The main difference with Harvard is that they have 13% in private equity and this portfolio has zero in that class. Instead, the portfolio has 27% in fixed income vs. Harvard's 13% in that category. There is also more in cash and less in "real assets" in my Mom's portfolio. This makes sense for a "small" investor. Small relative to Harvard though big relative to most personal finance bloggers :)

Wednesday, June 22, 2011

Further Portfolio Changes

Following up on the post on changes to my Mom's portfolio. The bank suggested some more investments. Two funds of REITs:

UBS Global Real Estate Securities. This fund is very new and as far as I could work out has an expense ratio of 1.92%. As there isn't much of a track record one can't know if the high expense ratio is worthwhile. So I passed on this one.

AXA WF Frm Europe Real Estate. This fund also invests in REITs and has a high expense ratio but its track record shows that it has outperformed the relative index with less volatility. So I am recommending to invest in this one.

Then they recommended a bunch of long-only commodity funds. I do like the look of a UBS CMCI Composite Index fund. It invests in futures across a wide range of commodity markets and of different maturities. The track record is good relative to conventional indices and the expense ratio is low. This is a risky bet, so we won't bet much on this.

Bottom line is I am now recommending these two funds, as well as the convertible bond fund and the UK equity fund I discussed last time and GTAA and CHN. As a result, we won't invest all the available cash right away. The AXA fund is the only slightly attractive real estate investment I've come across through this process, so we won't go big into real estate. If we make these moves the cumulative effect on the portfolio will be:



A large move out of cash and a smaller one out of bonds and into mainly non-US equities, commodities, and real estate. This moves the portfolio closer to typical endowment style portfolios.

Thursday, July 23, 2009

Pension Funds, Endowments, and Us

I've been thinking whether anything needs to be done with Moominmama's portfolio and benchmarked the broad asset allocation against a bunch of pension and endowment funds:



UniSuper Balanced and PSS(AP) are the default choices for two Australian superannuation funds. The Future Fund is an Australian Sovereign Wealth Fund. CALPERS is of course the California Public Retirement system and then there is the average US university endowment and three Ivy League endowments. Excepting the Ivy's the average for the two US funds is very close to that for the three Australian funds: 42% equity, 23% bonds and cash, and 35% alternatives (hedge funds, real estate, private equity etc.). Retrospectively the Ivy's had too much in alternatives and too little in cash to meet their needs. Nobody though has as much as Moominmama has in bonds and cash. As I've often said, it's hard to imagine bonds performing as well in the future as they have in the past when they were boosted by capital gains due to declining interest rates since the early 1980s. She receives government pensions and even if she didn't she has many years worth of expenses in cash alone let alone bonds. Even if her medical costs rise I still think there is plenty of cash. Long term I think it'd make sense to head to say 30% in bonds and cash. Some time soon I think it would make sense to sell some shares in bond funds and increase other investments.

Monday, June 29, 2009

Endowments Update

Barrons' has updated the portfolio allocations for Yale, Princeton, and the average US educational endowment:



Compare these to a previous table they produced. Yale's allocation has shifted very little so maybe it isn't very up to date. Princeton and the average endowment has been forced to increase the allocation to private equity and real assets and reduce the allocation to stocks due to the moves in the markets.

Tuesday, April 28, 2009

Asset Class Performance Through the GFC



This post follows up with the performance in the last 4 month of the asset classes I discussed in the context of endowment style portfolios in December. The chart shows a bunch of funds and indices and a simulation of my current "target portfolio" - the thick brown line - through the end of March. That's not the portfolio I have, which is heavier in stocks and lighter on managed futures but the one I am aspiring to in the next few years. The simulation uses:

47% MSCI World
14% Credit Suisse/Tremont Hedge Fund Index
14% Man AHL Managed Futures
10% TIAA Real Estate
10% TIAA Bond Market
5% AUD Cash

Then a 50% hedge into the Australian Dollar is applied and the portfolio is invested in with 120% of equity (i.e. borrowing an extra 20 cents for each dollar). Returns are in USD terms. The portfolio certainly does not escape the financial crisis and by following the path of the AUD you can see that the hedge into Australian Dollars exacerbates the bad performance.

The portfolio did well in the previous bear market but except for a portfolio constructed of bonds and managed futures this bear market has been too sharp for anything to do well.

The target portfolio has a beta of 0.86 and an annual alpha of 5.66% relative to the MSCI World Index. Not considering tax consequences, you could have constructed a smoother and better performing portfolio from managed futures, hedge funds, and real estate. Or really just managed futures and hedge funds...

Next up, I'll look at the problem from the Australian investor's viewpoint (i.e. in AUD)

Thursday, April 16, 2009

Investment Choice

In this final post in this series I'm going to look at the investment choice in my super fund. You can either choose a preset mix of asset classes or make your own choice from a short menu. The premixed options have slightly higher percentage management fees but choosing the a la carte option incurs an extra $60 fee per year. I suppose the extra percentage fee is either for rebalancing or for access to the alternative asset class that is not included in the menu. And the property component is a mix of direct property investments and REITS while the a la carte option is REITS only. The "Growth" portfolio costs 0.57% vs. 0.37% for "Australian Shares" and 0.33% for "International Shares".

These are the returns of the different pre-mixed options over the last 5 financial years, the current financial year till the end of December and the current quarter.







Over 5 years till June 2008 the High Growth portfolio has the highest return. Over 7 years though (not shown) the Growth Portfolio had slightly higher returns (7.14%, after tax of course).

The Growth portfolio is invested 32.5% in Australian Shares, 30% in International Shares, 15% in Fixed Interest, 12.5% in Alternative Investments, and 10% in Property. In other words it is a 60/40 portfolio with a diversified 40 component. The High Growth portfolio is invested 40% in Australian Shares, 32.5% in International Shares, 17.5% in Alternative Investments, and 10% in Property. The Balanced portfolio is 30% Fixed Interest, 27.5% Australian Shares, 25% International Shares, 10% Property, and 7.5% Alternatives.

My current target is 28% Australian Shares, 14% International Shares, 10% Bonds, 9% Property, 33% Alternatives, and 6% Cash and Other Assets. But it turns out that Unisuper's alternatives are infrastructure (which I classify as real estate) and private equity. And, in fact, all current alternative investments are infrastructure or timber plantations.

It turns out that the Growth Portfolio is nearest to my target allocation, though it is still further from my target than our current portfolio is. Snork Maiden's superannuation is closer to the target than the current portfolio. Compared to other portfolios I track it is the following "distance" from:

Moom 28%
Moominmama 47%
PSS(AP) 28%
CALPERS 38%
Yale 47%
Harvard 36%
Princeton 51%
Average US Endowment 39%
The Future Fund 28%

Not surprisingly, it's most similar to other Australian funds. It is also a good diversifier relative to Moominmama. It's not possible to get closer to my target using choices from the a la carte menu. So the choice is made.

Tuesday, January 13, 2009

Endowment Style Portfolios for December 2008

When I tried to optimize the performance of the asset mix used for the portfolios in my post about endowment style portfolios by maximizing the Sharpe ratio using historical data I ended up with a 100% allocation to the real estate fund. But this fund lost 7% in December. Now the optimal allocation is 9% managed futures, 4% hedge funds, 66% real estate, 20% bonds, and 1% gold. It has a beta of 0.03 to the MSCI stock index. No stocks of course as they have returned too little with too much volatility in the last 12 years. A portfolio with 1/7 in each of these assets plus Australian Dollars has about the same returns historically but double the volatility (but 1/3 the volatility of stocks still). It would have returned 2.7% in December in USD terms (it has a beta of 0.28 to the stock market)

P.S.

Following the discussion in the comments I want to say that this isn't intended as a serious exercise in choosing a portfolio allocation but as a kind of thought experiment about what would have historically been the best portfolio with perfect hindsight. I'm pretty skeptical also about so-called "forward looking" portfolio optimizations too. They need to make some pretty strong assumptions. But all of this can be useful inputs into developing a portfolio allocation that works for you.

Thursday, January 08, 2009

CALPERS Allocation


CALPERS (the California state retirement fund) provides detailed information on their asset allocation. CALPERS has much more of a traditional US allocation than the other portfolios I've examined. The top part of the table now shows Moom and Moominmama's allocations (updated for January) the Australian and Californian public retirement funds, the three Ivy Leagues, the average US university endowment and the Australian Future Fund. The lower part of the table shows the "distance" between the four selected portfolios at left and the the portfolios listed across the table. Moom is most dissimilar to CALPERS, Moominmama, and Yale and most similar to PSS(AP). Moominmama is most dissimilar to Moom and most similar to PSS(AP), CALPERS, and the typical US university endowment. PSS(AP) has a similar level of dissimilarity to all the portfolios but is most dissimilar to Princeton, Yale and CALPERS and most similar to Harvard and the Future Fund. CALPERS is most dissimilar to Moom and most like the average US university endowment.

If you'd like me to analyze any other portfolios or make any comparisons let me know.

Saturday, January 03, 2009

Goals for 2009

Unlike previous years I'm not going to set any quantitative financial goals for this year as there is too much uncertainty. On the investment management side I would like to:

1. Improve alpha to return to positive numbers or a more positive number depending on which method you use to estimate it.

2. Continue to progress towards a long-term asset allocation that is more like an endowment fund approach as the markets permit.

The major goal though is to get a decent job (3). In any case, I want to (4) continue the progress I've made on getting my academic research back on track (I now have 3 papers I've submitted for review). At the end of the year some should be accepted for publication and I should have that number under review again. If I can (5) make some progress on the business front of trying to do something with my trading models that would be good too. And finally (6) I want to lose some weight. Trying to eat better and get more exercise via cycling etc. will be the methods.

Six goals is plenty I think :)

Friday, December 12, 2008

Performance of Endowment Style Portfolios



In the final post of this series I look at the performance of an endowment type portfolio over the last 12 years. 10% is invested in the CREF Bond Fund and the remaining 90% split equally between the MSCI World Index, the Man-AHL Diversified Fund, the Credit Suisse/Tremont Hedge Fund Index, and the TIAA-Real Estate Fund. As is the case with all the portfolios I've posted here the portfolio is rebalanced monthly. This is the Balanced Portfolio. The Levered Portfolio borrows 45 cents for each dollar invested. In other words, the managed futures and stock portion of the portfolio are geared by 50% (one dollar borrowed for each dollar invested). The unlevered portfolio returns 0.83% per month (10.4% p.a.) with a monthly volatility of only 1.78%. The levered portfolio returns 1.08% per month (13.7% p.a.) with a monthly volatility of only 2.58%. This volatility is roughly half that of stocks or managed futures and the return is more than double what stocks returned in this period. Beta to the stock market is 0.35.

These results look better in the last couple of months than Ray Dalio's All Weather Portfolio, which is one of my inspirations. The reason is that while the AWP only includes "beta sources" the portfolio proposed in this post has 45% of assets allocated to "alpha sources" (i.e. they produce alpha relative to the MSCI benchmark).

Implementing a strategy like this in Australia is probably going to require a self managed superannuation fund (similar but much more bureaucratic than a US IRA) for someone like me with half or more of net worth in superannuation as I haven't found a regular superannuation provider with a managed futures option or for that matter a hedge funds option. Funds like PSS(AP) have some money invested in hedge funds of course, but you can't increase that proportion. You can decrease it by also investing in some of their single asset class funds.

Thursday, December 11, 2008

Hedge Funds vs. Managed Futures

In recent posts I have looked at the optimal allocation between stocks and managed futures and between stocks and a composite hedge fund index. The Sharpe Ratio maximizing choice of managed futures was between 55 and 75% of the portfolio depending on the sample of months used. When choosing between stocks and hedge funds though the Sharpe Ratio was maxmized when the whole portfolio was allocated to hedge funds. In fact it was even better to short stocks and go long hedge funds.

But what is the best choice between a generic hedge fund index and a managed futures fund? Using data on the Credit Suisse/Tremont Index and the Man-AHL Diversified Fund for October 1996 to October 2008 the Sharpe Ratio is maximized for an allocation of 30% to the managed futures fund and 70% to the Hedge Fund Index. This portfolio has only slightly higher volatility than the hedge fund index (2.31% vs. 2.14%) and a higher return (1.012% vs. 0.787% per month). By borrowing 72 cents for each dollar invested you could boost returns to the level of the managed futures fund - 1.54% per month with less volatility (3.97% vs. 5.16%) and a slightly lower volatility than stocks.

I've also run portfolio analyses including the MSCI, Man-AHL, Credit Suisse/Tremont, and the TIAA Real Estate Fund and CREF Bond Fund to represent two further asset classes. The maximum Sharpe Ratio was for a portfolio 100% in the real estate fund...

In the real world taking into account tax and other considerations, limitations on leverage (or safer forms of leverage), higher moment correlations, and likely higher future returns from stocks (than in this lost decade period) the best portfolio probably wouldn't be as extreme as these simple analyses indicate. But it would be very different from most people's portfolios and much more similar to the university endowment portfolios. I'll analyse some endowment type portfolios in my next post.

Monday, December 08, 2008

Future Fund Allocation

The Australian Government has a sovereign wealth fund known as the Future Fund. The Commonwealth Government has run budget surpluses for many years. Once they had paid down most of the national debt they started to accumulate surpluses which in 2006 were allocated to this fund and dedicated to funding previously unfunded defined benefit retirement payments to public servants. The Future Fund's website gives some information on their investment policies:

Equities: 35%
Tangible Assets: 30%
Debt: 20%
Alternative Assets: 15%
Cash: 0%

Based on the PSS(AP) superannuation fund we can guess that 7% is allocated to US equities and therefore 28% to non-US equities. We can then compare this portfolio to the others I already discussed.

Both the PSS(AP) portfolio and Moominmama are almost as close to this allocation as they are to the average US university endowment fund. Moom is slightly closer to this portfolio than to the average US endowment but quite far from both (39% and 43%). Compared to PSS(AP) - which of course is an Australian government defined contribution retirement fund - the Future fund has double the allocation to debt and to real assets and is much lighter in equities and cash.

Thursday, December 04, 2008

Endowment Asset Allocations II

Following up on my recent post about endowment asset allocations I've updated Moom's and Moominmama's numbers for November and also added the allocation of the Public Sector Superannuation Scheme (Accumulation Plan) which is Snork Maiden's retirement account:



The PSS(AP) allocation is the "trustee choice" or default option. We are investing 90% in this and 10% in the "Sustainable Option" which is Australian shares with a green bias. That increases the equity percentage of her portfolio and brings it closer to our developing target allocation.*

The top panel in the table is the allocation of each of the portfolios to the different asset classes while the bottom panel is the Euclidean distance between the portfolios on the left and the those listed on the top line. Moom is closest to the PSS(AP) portfolio, which is not so surprising as they are both Australian based allocations. Moom is also nearer the average US endowment than to Moominmama. This diversification is probably a good thing. While Moominmama is nearest to the average US endowment she is also quite close to the PSS(AP) portfolio.

Moom's allocation moved further from the US endowments and from Moominmama's portfolio this month, mainly due to selling US equities.

* Snork Maiden's retirement portfolio is 17% from our target portfolio and 23% from our current overall portfolio.

P.S.

The New York Times reports on the losses of the Harvard endowment. Their losses in July-October pretty much match the S&P 500's losses (23%) but are better than the MSCI World Index (33% loss). And they are far far better than Moom's performance (47% loss in USD terms).


P.P.S. 8th December

I just found more accurate information on the PSS(AP) superannuation fund's current allocation (rather than the targets in the prospectus):

Hedge funds 15%, Domestic Equity (US) 9%, Fixed Income 10%, Foreign Equity 33%, Private Equity 7%, Real Assets 15%, and Cash 11%.

Given this Moom's distance from this portfolio is 26% and Moominmama's 28%. So we are both closer to this portfolio than to any of the US endowments.

P.P.P.S. 10th December

Harvard's actual allocation to foreign equity is 22% not 2%!

Monday, November 10, 2008

Endowment Asset Allocations

Interesting article in Barrons this week on the performance of U.S. college endowments. In recent years endowments have increased exposure to alternative investments in an attempt to emulate the star endowments of Yale and Harvard. Barrons' main argument is that while this strategy looked good up till this year recently alternatives have performed just as badly as traditional assets (stocks and bonds) and that maybe these funds should focus more on traditional assets in future:



(I don't know how they're coming up with a 50% loss in private equity since June 30 - I think this is just a wild guess based on assuming that private equity moves like public equity and as it is levered the losses will be worse. Private equity funds aren't reporting these kind of losses as is discussed in another Barrons' article on Blackstone). In contrast to the article and the headline on the table, the theory of rebalancing would argue for putting more money into the alternatives that have had recent poor performance. What do you think?

Having a lot in alternatives hasn't done Moom and Moominmama much good either. These are our allocations at the end of October:



Compared to the star endowments Moom has heaps of foreign equity (mainly Australian stocks) and low allocations to private equity and real assets. Moominmama has piles of bonds and cash and zero allocation to private equity and a low allocation to real assets. Of course, our low allocation to US stocks is because we are not US based. Moom had a 46% allocation to his domestic equity but Moominmama has a zero allocation to her domestic equity. The average between our two portfolios is not that far from the portfolio of the average educational endowment as estimated by Bloomberg. And despite Barrons' article that might not be a bad benchmark to aim for in the long-term.

P.S.

Using the concept of Euclidian distance we can compute the similarities between the portfolios (I dropped Stanford from the sample). Moom is closest to the average endowment with a distance of 38% and furthest from Harvard with a distance of 56%. Moominmama is also closest to the average endowment (30%) and furthest from Princeton (41%). The distance between Moom and Moominmama is 49%.