Tuesday, August 19, 2008

A Harvard Education

I've never been ashamed to tell people I went to the University of Kansas.

I had a helluva lot of fun in Lawrence. I have the legal documentation to substantiate some of these shenanigans, and the statute of limitations is waning on the others, which I still categorically deny. In the interludes between these various lowjinks, I did my best to learn as much as I could from the smartest people I could find.

It's a good strategy. I still use it. Which is why I like to keep an eye on Harvard.

Harvard's endowment is somewhere in the neighborhood of $35 billion. That's a nice neighborhood. About a tenth of that trove is invested in equities, or roughly $3.5 billion. (How's that for an impressive financial calculation? My dad was absolutely blown away when I came home from my first semester with an A in math. I opted not to tell the old man that my instructor for that particular class also happened to be a bartender at The Wheel, where I pulled a series of impressive all-night "study sessions.")

Anyway, I dig the Harvard portfolio. It's run by obviously intelligent people, not just because they are from Harvard, but because this is the big leagues of financial management. Indeed: Harvard Management has a five-year annualized rate of return of about 23 percent, which is enough to double any investment in a little over three years.

But most of all, I like Harvard Management Co. because they hold only about 200 stocks, and nearly half of the portfolio is in its top ten holdings. To that end, I'd like to present the managers of the Harvard Management Co. with a pair of Brass Umlauts -- a far more exclusive honor than membership in the Porcellian Club. Its managers are only the second inductee into the Order of the Umlaut. (John Thain, the excellent chief of Merrill Lynch, was the first, for buying MER shares in the face of scathing criticism of his perforomance.)

Harvard's top ten holdings are almost entirely held in exchange-traded funds that focus on foreign markets. (It also owns shares in Weyerhauser and Clear Channel Communications. Radio has been one of the biggest losers this year, according to data from Morninstar, which suggests this is a wicked ballsy value play.)

Exchange-traded funds, if you've never heard of them or think they sound scary, are actually pretty easy to understand. They are similar to mutual funds -- both hold baskets of securities -- but ETFs carry significantly lower fees and are priced throughout the trading day as investors buy and sell them. Mutual fund prices -- "net asset values" -- are calculated only once a day, after the market closes, and their shares are not "bought and sold" but "issued and redeemed" by their investment companies. Mutual funds are not traded.

ETFs offer supereasy access to markets that would otherwise be out of reach -- it's possible but a pain to buy stocks on foreign exchanges. Most domestic brokers don't offer the service, and those who do charge relatively high fees. ETFs get around that. ETFs also overcome the far bigger hurdle when investing abroad: They pick the stocks in those markets, usually by mirroring a major index.

You get this expertise and avoid fees by investing in ETFs using your Scottrade account. If you don't have one, then for God's sake click here and open one. I don't get a kickback, I just think Scottrade is a good outfit, and it's a good idea to have the artillery ready. You'll need a brokerage account when you're ready to raid Wall Street, so you might as well open one.

Harvard recently reallocated it portfolio. (It has to report to the SEC, and I snagged the filings.) It dumped shares in its emerging-markets income fund and reduced its holdings in South Korea and Mexico. It added shares to its positions in Brazil, China and South Africa. And it took a massive stake in an ETF based in Taiwan.

Taiwan? Yes. The market hasn't been stellar. Its five-year annualized return is +6.8%, its 10-year performance is +2.0%. Hey, you can get shitty returns like that right here at home with the good old S&P 500, which is at +5.5% for five years and +2.9% for the past ten. But Brazil? Try +46.8% annualized reeturn for the past five years. China posted 15%.

When I see smart people with a track record like Harvard's making bets like that, I have to think that the time has come to consider mirroring the trade. Now, there are some good things to consider: Taiwan's index has a PE of half the S&P, and it pays a higher average dividend. But given a global economic slowdown and shares that have been battered along with everyone else's ... and Taiwan doesn't look like a particularly great buy.

Those of you who know me will know that those are the exact market conditions I look for. Undervalued and overlooked.

Here are Harvard's picks: IWN, EWZ, EEM, FXI, EWY, EWW and EZA. The Taiwanese ETF is the iShares MSCI Taiwan fund. You can buy 100 shares for about $1,400, and I'm recommending this play. If you've never invested abroad, you're closing the door on countries with far higher growth potential and markets with far richer returns than the United States -- our stocks haven't been the world's best performer in about 60 years.

KU's colors are crimson and blue, the colors, ahem, of Harvard and Yale. I checked Yale's portfolio and it's loaded up with blue-chip stocks. Boo! I don't know how things are going to turn out on the football season this year, and to be honest, I couldn't care less. I'll be warching KU football (proud motto: "A tradition since last year"). But when it comes to Harvard and Yale's respective portfolios, Harvard is right on the money. The lads at Cambridge are going to absolutely shellack the boys from New Haven. To that end, go Crimson!

If you want to learn more about ETFs, click here.


Anonymous said...

You have a skill like no other!

Laurel is a treasure (and looks like her Daddy).


Anonymous said...

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