FRIDAY SEPTEMBER 25, 2009

Those Ivy geeks ain't that smart!

This week, many of the Ivy League schools announced that their huge endowments lost roughly 25% of their value in the twelve months ending June 30, 2009. My alma mater, Cornell, announced a loss of 26%. Pretty bad, but still better than Harvard’s -30% and Yale’s -29%! (Interestingly, Cornell beat both schools in Lacrosse this year as well, but I digress!)


These large endowments have been trend setters in investments in the last decade. They pioneered the use of “alternative investments” such as hedge funds, private equity and real assets (real estate and commodities) in diversified portfolios. The inclusion of these assets generated eye-popping returns in the good times and many investors looked to mimic the “Harvard-Yale” model. One of the most interesting facets of the model was the reduction in the allocation to fixed income products. As the theory went, low yielding, boring, liquid assets were not necessary for endowments with a time horizon measured in perpetuity. Last year’s economic crisis showed this concept of the model to be a hugely flawed. The “alternative investments” had little liquidity from the start.  When the markets crashed, the liquidity, and the value, of these investments literally evaporated. The endowments were forced to liquidate more liquid, high quality assets to raise the necessary cash to manage their obligations to the operating budgets of their schools.  It sure would have been nice to have some stodgy bonds in the endowmment find.

 

By the way, a simple, balanced portfolio of 60% stocks and 40% bonds returned -13.5% over the year ending June 30, 2009. Nothing to write home about for sure, but not catastrophic either. And it’s a lot better than -25%. Despite all the sophisticated trends and innovations in investments over the last many years, a simple, diversified portfolio of high quality investments continues to get the job done. It’s an important lesson for us “average Joe” investors to understand. Those Ivy geeks ain’t that smart after all!   

POSTED AT 1899-12-30 16:58:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.