Thread by @shortl2021

1/22. Back in June, I did a snarky tweet on #Harvard Endowment's asset allocation on the eve of the GBB (Great Bubble Burst). At the time, I thought Harvard was an outlier: I was wrong! IMHO, Ivy portfolios will become clusterf*ck central in the GBB.

https://twitter.com/shortl2021/status/1537131606024015872?s=20&t=ijb93vsXabcJAcUeSeCQqg

2/22. Let's prepare the groundwork. We head off first to the National Association of College and University Business Officers (NACUBO) for their 2021 annual endowment study.

nacubo.org/Research/2021/…

3/22. So the 720 colleges in their survey have $821 billion in endowment assets, which have grown 35% in one year. Not bad!

4/22. We see the first mention of "private equity" as a driver of performance in this slide. Note that 30.6% performance return lags the 35% jump in assets due to gifting.

5/22. Now this, to me, is the first WTF slide. Note the Ivies to the left, their poorer brethren to the right. Also, for your reference, the 8 Ivies had total endowments of $193 billion in 2021, compared with $628 billion for the other 712 academic institutions.

6/22. So we have our first significant finding. The Ivies, which totally dominate the $1 billion plus endowment category, have only 28.7% investment in public equities, versus 30% in private equity. Moreover, fixed income is a minor 10% as well.

7/22. I knew something was going severely wrong with the traditionally conservative end of the institutional investor industry (pensions, endowments, insurance), when I did some work with a UK local govt pension in the late 2010s.

8/22. As an ex-hedgie myself, I looked at this pension fund's asset allocation profile & thought someone had got the table wrong. Perhaps I'm an old-fashioned git, but my belief is that hedge fund portfolios are allowed to be edgy but pension fund portfolios should be BORING!

9/22. Moreover, when I did my CFA, I learned all about the "prudent man principle" (probably now rebranded, & rightly so, the "prudent person principle"). This means that if you are a pension or endowment fund trustee managing other people's money, you should, well, be "prudent".

10/22. The pension fund committee in my particular experience was composed of English rural county councillors, being advised by an Independent Financial Advisor (IFA).

11/22. One particular county councillor, despite not knowing what a Sharpe Ratio was if it had bit him in the arse, told the IFA exactly what he wanted; and when it came to private equity he wanted MOAR!

12/22 I sat there open-mouthed. Every portfolio manager of my generation has read and was influenced by Yale endowment's former CEO David Svensen's book below.

13/22. Surely we had reached an asset allocation Minsky Moment when Svensen's championing of alternatives was voiced by a gentleman farmer usually on his 3rd large G&T by lunchtime who thought reading too many books was close to socialism (time better spent watching cricket).

14/22. And since the dumb money has been pouring into the space, then the highly credentialed & experienced Ivy endowment fund managers have been using this as a chance to exit? Well, no! They have also said, "Give us MOAR!"

bnnbloomberg.ca/ivy-league-end…

15/22. Narrowing our focus to the 8 Ivies, here are there latest endowment sizes and one year returns:

16/22.

Let's look at some of the Big Dogs, starting with #Harvard. Ironically, if you read the CEO's annual report letter carefully, you find that "Narv: Narvekar laments having to take lower risk than his peers!

hmc.harvard.edu/wp-content/upl…

14/22. "For each of the last 3 FYs, asset allocation/risk level was a significant determinant of returns — the higher the risk taken, the higher the return generated. The same was true in FY21, with one major difference. During the previous 3 FYs, ...."

15/22. "...the impact was measured in a few %age pts. In fact, during that period, HMC’s strong alpha generation was enough to overcome the impact of a lower level of portfolio risk. By contrast, the impact of lower portfolio risk this past FY was measured in 10s of %age pts.

16/22. So, in October 2021, Harvard CEO "Narv" Narvekar suggests that they have been too wimpish with their asset allocation. How about #Yale? I encourage you to scroll down their web page, and read the accompanying text. It's full of gems like this.

investments.yale.edu

17/22.

"Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management."

18/22. So, although everyone & their mother are pouring into the space, including my 3 gin-&-tonics by lunchtime pension fund man, financial theory about market efficiency is BS. Public markets are for losers, when you can find multi-billion $ PE free lunches for decades on end.

19/22. Now, over to #Princeton, what have we there?

princo.princeton.edu/about/investme…

20/22. From the text below, the superior returns coming from their huge overweighting of non-traditional asset classes is due to Princeton's "competitive advantage". That's nice.

21/22.

It's humbling that Harvard, Yale, Princeton, UPENN, Columbia, Cornell, Dartmouth & Brown; plus all the large pension funds & insurance companies; and not forgetting every mother who walks the earth and writes the portfolio annual review has a "competitive advantage".

22/22. What happens when we get the GBB (Great Bubble Burst)? Will leave you with this chart from an MPI report titled "How Much Risk Are Ivy Endowments Taking, subtitled "Lessons (not) learned: our analysis shows Ivies at pre-GFC levels of risk". Lots more to come from me.