You can’t clone Yale:

Can you copy great endowment investment performance?  The Yale endowment, for example?

Reverse-engineering a good performer is probably achievable.  The key attributes can often be identified and, to some extent, duplicated.

But can you replicate great performers?

That’s a much taller order.  There’s always something slightly mysterious about greatness.

We were reminded of that fact when we looked at a recent white paper by Drew Knowles.  He’s the founder and chief investment officer of Berkeley Square Capital Management, an investment advisor in Denver.

“Invest Like an Endowment” is available here:

http://www.valuewalk.com/2016/03/invest-like-university-endowments/

Mr. Knowles assembled data from NACUBO-Commonfund (NCSE) surveys and analyzed recent historical relationships between asset allocation, endowment size, and performance.  He did a good job and it’s worth reading.

As an investment advisor to (not necessarily wealthy) individuals he would like to demonstrate how they can use ETFs to replicate the investment performance of major endowments.  He’s particularly interested in showing the usefulness of so-called “liquid alternatives,” in which his firm seems to specialize.

He argues that this really can be done, at least to the extent of reproducing the average performance of big (over $1 billion AUM) endowments.

It would be even better if an amateur could match the performance of the very best endowments, such as Yale.  Unfortunately, his model says they can’t quite.  But he argues that his Yale Clone should still be an attractive portfolio for the average investor, and makes a good case for it.

Mr. Knowles suggests that an individual investor, by using certain low-fee index-tracking ETFs and rebalancing every year per the latest NCSE data, can do (very nearly) as well as the average big endowment with its professional investment staff and well-compensated external asset managers.  He only actually demonstrates this for 2003-2015, since not all his preferred tracking ETFs existed in earlier periods; but so far, so good. 

The Worlds Best Institutional Investors? It’s Not That Simple

There is no place like New York for exceptional investment professionals.

Yet with the world’s best and brightest just a cab-ride away, the challenge of building superior investment teams that can endure and outperform over a decade or more is daunting and seldom achieved.

Consistent, multi-decade superiority isn’t impossible, but it’s exceedingly rare, and many redoubtable firms have just vanished.

There are a very few, semi-mythical beasts like David F. Swensen and Warren Buffett, of course.

Swensen built a process for identifying superior outside managers, cementing relationships, and staying with them as long as they are judged to have the edge.  He was also an innovator with first-mover advantage in many respects which can’t be replicated.

One of my professors at The University of Chicago once remarked that some money managers seem to have the touch.  And we can theorize, not always correctly, about how they do it.  But most of them have a run bracketed by a certain period or a set of conditions, and then they are gone.

Why is this?

Paul Wachter, the outgoing investment chair of the University of California Regents, was recently asked by Leanna Orr, in an interview for CIO Magazine, about the criteria used by the UC regents during their search in 2014 for a chief investment officer. 

Mr. Wachter listed three principal qualities the UC board looked for in a candidate.

Number one: Organizational skills.  Someone with serious organizational skills, who could work effectively with a big institution like the UC system.

Number two: Personality.  Someone with the personality to work constructively with all of those different constituents, from the board and president to student groups

Number three: Investment skill. 

But he added a caveat to number three.

Michigan State University has hired their first chief investment officer

Michigan State is on a roll.

In college football they’re rated number three in the country and still in contention for the national championship.  And, they’re undefeated and rated number one in early-season basketball.

Not bad; but we’ve got even bigger news.

My friend Philip Zecher has just been appointed MSU’s first-ever chief investment officer, reporting directly to Dr. Lou Anna K. Simon, MSU’s president. The trustees announced the appointment on Friday and Phil called me up to give me the official word.

Phil is a low-profile guy with an impressive background, but he’s now moving up into a more prominent position: running $2.3 billion of the school’s $2.7 billion endowment. ($400 million resides in the MSU Foundation and will continue to be run by that board.)

So, this letter may help to introduce him to the foundation and endowment community and to the asset managers who will be doing business with him.

Rebutting the Endowment Critics:

The “Hoarding” Hoax and “Excessive” Private-equity Fees

Victor Fleischer, a law professor at the University of San Diego, expressed outrage this summer that Harvard, Yale, and other well-endowed schools have been “hoarding” their tax-exempt endowment cash, mostly, he alleges, at the expense of students.

He and others in his camp argue that Congress should override the judgement of university leaders and compel them to spend at least 8 percent of their endowment funds every year (instead of the current average of about 4.5 percent).

Had congress adopted this plan in 1990, these critics calculate that the Yale endowment would be two fifths the size it is now, $10 billion versus today’s $24 billion. 

But “sky-high tuition increases” would supposedly stop.

Are we missing something here?