What do the Ivy League University Endowment Funds do that we don’t?

The Ivy League Universities are ahead of the field when it comes to diversified multi-asset class investing. They have been doing this successfully for over twenty years. By using this methodology with investments they have constantly achieved incredible success whilst maintaining low volatility and only occasional reverses to continued growth.
Professor Harry Markowitz, the Nobel Prize winner studied the concept of investing via the multi-asset approach. He ended up calling it the Modern Portfolio Theory. This study indicates just how risk adjusted returns can be improved by diversification across assets with varied correlations. Modern Portfolio Theory is at the centre of how the Ivy League Endowment Funds invest their money. They use this principle above all others to build the portfolios that are the envy of most domestic and international investors.
These Funds have access to some of the best fund managers and private equity portfolios in the world. Naturally, this also helps in how successful they are. What we all want to know is how they do it and can we follow them in their success with our own money. The answer is a resounding ‘Yes’. It is very possible for the rest of us mere mortals to achieve high levels of risk adjusted return which will obtain better results than the traditional equity/bond portfolios and most balanced investment funds.
What are US Endowment Funds?
They are funds which are non-taxable and are established to make payments for funding anything that the education facilities needed. The money is collected from many different sources including legacies, gifts and investment returns. In America alone there are more than 700 endowments with an average of USD400 million in funds; the largest fund has nearly USD30 billion. So, why do these funds achieve so much better results with such consistency? It is important to look at how it is done and planned. Once we have seen this then this is a major step in understanding how it is all achieved. To begin with let’s look at the larger endowment funds. Those with a value of over USD1 billion have managed to give an annualized return of 12 percent. This is about 3 percent more than a traditional US portfolio while operating at a lower level of investment risk.
Also, the US endowment funds are active and imaginative portfolios that have access to all the asset classes. This gives more diversification benefits than most funds can offer, which leads to higher potential gains whilst minimizing volatility. This can be seen from the fact that the large endowment funds hold just over 60% in equities and bonds whereas an average US endowment fund will hold almost 85%. The extra diversification is one of the main reasons for the superior long-term investment performance.
The other main thing to consider is that these funds are usually planned with long-term investment targets whilst at the same time maintaining a non-volatile approach. This means that they do not have to be subjected to the vagaries of having to time things in the markets so as to generate results and income. It also means they should have cheaper trading costs.
The Super Endowments of Harvard and Yale
The asset allocation of the ‘Super Endowments’ of Harvard and Yale are always up there with annual results that usually put them in the top 10 of US endowments. From 1996 to 2006, Harvard and Yale returned 15.2 and 17.2 percent respectively. This performance is a lot better than that of its rivals. Just to back up what was mentioned above, the Harvard endowment fund is also the largest in the US at USD29.2 billion and the Yale Endowment fund is the second largest at USD18 billion. The latter did take a hit this year but it is still ranked up there with the best. This also shows that fund results should always be looked at over a period of time and not a couple of months.
The Super Endowment funds are amongst the most innovative when it comes to multi-asset investing. At the end of last year only 47% of their portfolios were in traditional assets. Compare this with the 86% for the average endowment and 61% for the other average large endowments. If you look at the alternative assets, the majority have been placed in hedge funds. Other funds do this as well. Where they differ is that the Harvard and Yale funds have a much larger slice in commodities and private equity.
As with most endowment funds, the asset allocations of the Super Endowment funds have been very stable. Since 1999, they have repositioned just 8.5 percent of the portfolio each year. The non-volatile allocations show the long-term goals, the need to select assets through economic cycles and whist keeping costs at an absolute minimum.
Index investing using the asset allocations of the Super Endowments
Given the consistent out performance of these funds it is tempting to try and benchmark them and follow what they do. The trouble with this is that most people cannot invest in the same way as these funds, especially when it comes to such things as private equity. However, reasonable returns can still be had by following the multi-asset approach of these funds within an index tracking portfolio. If you did this then the following would transpire:
Since 1999, your own special portfolio would have just 52 percent in equities and bonds and would return an average of 9.3% per annum. Compare this with 4.4% for a US Equity and Bond portfolio.
Also, these results have out-performed many managed funds. For example, if compared with UK balanced funds since 2001 the total return of the index tracker has been considerably more than most of the funds rated by the S&P and with a lot less volatility. This indicates how important it is to have a multi-asseted portfolio.
Summary
These Endowment funds have, year in and year out, managed to achieve good investment returns with low volatility. This is due to the multi-asset methodology they adopt and not being afraid to go into the alternative asset classes.
Obviously, most investors cannot invest in the same way. However, from the above it can be seen that by following the same ideology then an individual investor will achieve returns that have managed to outperform more traditional portfolios. This is also true for some of the better managed funds. But it must be remembered that these Ivy League funds have a long investment goal along with low liquidity needs.
All of this is very similar to our favoured fund managers Miton Optimal. Their own investment philosophy is very similar by the fact they are Global Tactical Asset Allocation Specialists who utilize the multi-manager approach and focus on absolute not relative returns. Also, they are not constrained by benchmarks. Basically, what this means is that they can outperform in both Bull and Bear Markets. On top of this they can be overweight esoteric areas whilst at the same time have an active response to changing conditions. If they do not like an area then they are not obliged to invest there. This is why they have won so many awards from S&P, Lipper and Multi-Manager over the last five years.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Control Depth of Field - the second rule?

Control of Depth of Field really is the second rule of photography in my opinion. Before you ask, the first rule is to walk several meters closer to the subject!
The Depth of Field in any picture can often make or break the entire photograph, but knowing how to manipulate the depth of field improves your photography instantly!
The term Depth of Field is really an optical one and depends solely on the lens being used and the aperture selected. Altering the shutter speed does not change the Depth of Field.
Depth of Field really refers to the zone of “sharpness” (or being in acceptable focus) from foreground items to background items in any photograph.
The first concept to remember is “One Third forwards and Two Thirds back.” Again this is a law of optical physics, but means that the Depth of Field, from foreground to background in your photograph can be measured, and from the focus point in the photo, extends towards you by one third and extends away from the focus point by two thirds.
For those of you with SLR’s, especially the older manual focus SLR’s, you will even find a series of marks on the focussing ring of the lens to indicate the Depth of Field that is possible with that lens (and you probably wondered why there were all those extra marks on it!).
Take a look at this week’s photograph, which is really two shots, taken seconds apart of the Chinese lion statue. More importantly, look at the background. In one you can clearly see the leaves on the bush and the fountain spray, while on the other it is a soft blur. How did I change this Depth of Field sharpness? Answer, with a flick of the wrist!
You see, for each focal length of lens, the Depth of Field possible is altered by the Aperture. The rule here is simple - the higher the Aperture number, the greater the Depth of Field possible and the lower the Aperture number, the shorter the Depth of Field. In simple terms, for any given lens, you get greater front to back sharpness with f22 and you get very short front to back sharpness at f4.
For example, using a 24 mm focal length lens focussed on an object 2 meters away - if you select f22, the Depth of Field runs from just over 0.5 meter to 5 meters (4.5 meters total), but if you select f11 it only runs from 1 m to 4 m (3 m total) and if you choose f5.6 the Depth of Field is only from 1.5 m to 3 m (1.5 m total).
On the other hand, using a longer 135 mm focal length lens focussed at the same point 2 meters away, you get the following Depths of Field - at f22 it runs from 1.9 m to 2.2 m (0.3 m) and at f5.6 it is 1.95 m to 2.1 m (a total of 0.15 m).
Analysis of all these initially confusing numbers gives you now complete mastery of the Depth of Field in any of your photographs. Simply put another way - the higher the Aperture number, the greater the depth of field; the smaller the Aperture number the smaller the Depth of Field; plus the longer the lens, the shorter the Depth of Field, the shorter the lens, the longer the Depth of Field (just remember the ‘opposites’ - the longer gives shorter).
Now to apply this formula - when shooting a landscape for example, where you want great detail from the foreground, right the way through to the mountains five kilometers away, then use a short lens (24 mm is ideal) set at f22 and focussed on a point about 2 km away.
On the other hand, when shooting a portrait where you only want to have the eyes and mouth in sharp focus you would use a longer lens (and here the 135 is ideal) and a smaller Aperture number of around f5.6 to f4 and focus directly on the eyes to give that ultra short Depth of Field required.
Try it this weekend.

Modern Medicine: by Dr. Iain Corness, Consultant

How to live to be 110? Be happy!

There has been much discussion over many centuries as to whether your personality can predict your disease pattern. The simple answer is, “Yes it most certainly can.”
After much research, including clinical studies, the researchers have the answers. Be happy and stay well. Be aggressive and get heart attacks and cancer.
Now that does not mean that all happy folk live to be 110 and the misery bags turn in their credit cards at age 45 - but there is enough evidence to show that your personality type influences the kinds of diseases you will get later in life. Time for some introspection perhaps?
However, this latest research is really nothing new, it is more of a reinforcement of previous knowledge. In the times of Hippocrates, the healers were interested in the personality of the patient, because even then they felt that this had a bearing on the disease process. This conclusion was reached after observation of the patients. This combination of mind and body and disease is the basis for holistic healing, and even though Hippocrates and his healers did not have all our pharmaceutical treatments, wonderful tests and MRI’s, they did not just treat the disease, but also treated the person. Unfortunately there is also a tendency in our new super-scientific age to treat the test and forget to treat the person.
So why do we fall ill in the first place? Is it a personal weakness, is it just “lifestyle” or just plain bad luck? Since I am not a great believer in “luck” be it good or bad, my leaning after many decades of medicine is towards a type of individual “weakness”. After all, you can take two people with the same lifestyle but one gets ill and the other does not. Why? Simply, the sick person was more “susceptible” than the other - in some way they had a pre-disposition or call it a “weakness”. Simplistic I know, but it seems to fit. We just have to find it and counteract it.
So what factors seem to be involved in bringing about the pre-disposition. Genetics is one, and do play an important part. If your parents are diabetic then you will most likely have the problem too, but it is not absolutely inescapable. The modern scientific studies with large numbers of people have come up with interesting statistics. One famous researcher, Eysenck, lumped us all into four main personality categories.
Type 1 have a strong tendency to suppress their emotions and tend towards “hopelessness” and are unable to deal with personal stress.
Type 2 people, on the other hand, are also unable to deal with personal stress, but react to life with anger and aggression.
Type 3 is less clear-cut with a mixture of all these personality traits.
Type 4 covers the optimistic and relaxed who deal much better with interpersonal stress and external stressors.
Using these broad categories and looking at disease profiles that each type gets returned some interesting facts. Type 1 was the cancer prone group, Type 2 got heart disease, Type 3 got both while Type 4 people were not prone to either cancer or heart disease. Can you see what’s coming next?
Eysenck did not stop there. He went on to show that when people modified their personality they also modified their disease profile. When you think about it, this is staggering stuff! By attention to your personality profile you can modify your disease profile!
The most significant personality trait was “anger”. Learn to modify your anger response (and this can be done and is part of the concepts involved in Buddhism) and you become less “at risk”. This is the “jai yen yen” (cool heart) - but you can modify your personality to incorporate this. That last sentence can make you live ten years longer, happier and disease free. Forget all the wonder cures, just look at yourself first! Hippocrates did more than say oaths!

Learn to Live to Learn: with Andrew Watson

Another year, another dollar

Sometimes, it seems that’s what it’s all about. Nothing more. Just make a few quid. Charge like raging bulls (Coulson, ’06) for this, for that, for anything that takes your fancy. To hell with education, accountability, value for money and other apparently remote concepts. Hit ‘em where it hurts! In the pocket!
It’s funny (funny-sad) that so many come with such high expectations of education, based on a combination of where they’ve come from and their own experiences of education. So much so that they can’t see the wood for the trees, until it’s too late. I’m talking about parents and students coming for three or four years. I suppose we can handle things we wouldn’t countenance when we’re away, on the grounds that, “Well, we’ll sort it out when we get back to reality.” But what happens in the mean time? What are we subjecting our children to? It’s easier to turn our backs sometimes, isn’t it? Especially when the punishing truth might be too hard to handle? We wouldn’t want to disturb our barbecues or our beers, would we? Assumptions and accountability just don’t seem to mix. Where is that teacher you so loved? Why has she gone? Where has she gone? Don’t expect a straight answer to that!
In “International Education in Practice”, Hayden, Thompson and Walker (2002) state that, “It is often said that the good news is that many schools are currently doing a very successful job of educating their children, while the bad news is that they are successful in educating those children to take part in a world of the 1950’s and 1960’s rather than that of the new millennium.”
As educators we surely need to reflect on why this might be, when we consider the curriculum on offer. A ‘traditional’ curriculum is still widely used throughout the world, especially at a national level. It is essentially based on a ‘content’ model of education which has been around for many decades. But the world is a different place from that of 50 years ago; societies have changed and are changing, globalisation is here and our knowledge about the brain, how it functions and how we learn, has greatly increased.
Young (1998) says: “If the school curriculum is to become an emancipatory experience for a much larger section of each cohort of students, this is going to require much greater involvement of many people who currently have no direct links with school, including parents and employers, and many activities by teachers and pupils which are not confined to the school nor, in conventional terms, are usually defined as ‘educational’ at all”. At times like this, perhaps it is best to go “back to basics” and ask again, “What is the purpose of education?”
Education serves a different purpose for different people. For instance, the educational challenges that developed societies face today and may face tomorrow are very different from those faced by developing nations (Swamy, 2003). Be it correct or not, developed societies are educating themselves for the purpose of participating in a knowledge economy (Hargreaves, 2003), one that they themselves are shaping. Developing nations, on the other hand are still faced with the challenges of transformation to an industrialized economy while simultaneously attempting to establish valuable contributions to the information age. Within societies there are the masses at one end and the urban elite at the other.
Deciding the purpose of education for a poor public with no social infrastructure is radically different from deciding what the educational imperatives should be for a comparative minority who have the luxury of perhaps being seen as an effective change agent (Kumar, 2005) for an existing social or class order. The question is, does there exist a purpose that can transcend social, economic, cultural and intellectual differences amongst individuals in a society, a set of ‘universals’ that become the bedrock from which all educational discourse originates? (Geetu, 2006) A purpose that does not restrict itself to curricula shaped by current educational trends (education for the environment, education for sustainable development, education for citizenship, etc.) and one that is not dictated by cultural, local or global forces.
Personally, I think it all ought to begin with the end … what kind of human being is the student going to end up becoming? Educational trends and the ideologies they espouse are designed predominantly for and by and amongst an ‘urban elite’, but can we not find some common ground, on which to base our education for the future?
I read recently in Hayden, Thompson, Walker (2002) that “increasing globalization is perhaps the single most important reason why we need to develop internationally-minded curricula. In such a world, it is already essential to understand, relate to and coexist with other cultures whilst at the same time remaining a part of one’s own.”
George Walker takes the example of the IBO and says that it offers an education system “throughout the world, but not for the world.” He stresses the importance of each region to sculpt this education system to local needs, but at the same time recognises the fact that there will always be tension between the ‘standardisation’ requirements of a global passport to tertiary education and ‘local variability’. Maybe the common ground could develop from an idea of a combination of an international or national curriculum with a core curriculum and a local curriculum recognising local culture and needs?
Perhaps it is only after we can agree on the “what” of education in relation to “who” that we can consider implementing the “where and how” that students learn. If you’ve lived in a developing economy, you might be able to identify with thoughts on the impossibility of defining a universal purpose of education; as it is a product of resources and learning demands and depends on the capacity of nations and social classes to envision the future they want (Piore and Sabel in Young M, 1998). These values and expectations are constantly changing in a global, technologically influenced environment. This calls for the tall order of balancing different requirements; of “building a sense of community, protecting democracy, making education a public good as well as a private one and using new technologies to deepen learning, creating high quality education in contexts of great diversity.” (Hargreaves A, Fullan M 1998)
Next week: For the camera