Policy portfolio evolution – Harvard
1995 2005 2010
Domestic equities 38% 15% 11%
Foreign equities 15% 10% 11%
Emerging markets 5% 5% 11%
Private equity 12% 13% 13%
TOTAL EQUITY 70% 43% 46%
ABSOLUTE RETURN 0% 12% 16%
Commodities 6% 13% 14%
Real estate 7% 10% 9%
TOTAL REAL ASSETS 13% 23% 23%
Domestic bonds 15% 11% 4%
Foreign bonds 5% 5% 2%
High yield 2% 5% 2%
Inflation-indexed bonds 0% 6% 5%
TOTAL FIXED INCOME 22% 27% 13%
CASH -5% -5% 2%
TOTAL 100% 100% 100%
Source: Harvard Management Company
Yale – Asset allocation evolution
2004 2005 2006 2007 2008
Absolute return 26.10% 25.70% 23.30% 23.30% 25.10%
Domestic equity 14.8% 14.1% 11.6% 11% 10.1%
Fixed income 7.4% 4.9% 3.8% 4% 4%
Foreign equity 14.8% 13.7% 14.6% 14.1% 15.2%
Private equity 14.5% 14.8% 16.4% 18.7% 20.2%
Real assets 18.8% 25% 27.8% 27.1% 29.3%
Cash 3.5% 1.9% 2.5% 1.9% -3.9%
Source: Yale University, as at 30 June ’09
Harvard endowment annualised return
Harvard Policy portfolio 60/40 stock/ TUCS
benchmark bond portfolio* median**
1 year -27.3% -25.2% -13.5% -18.2%
5 years 6.2% 3.9% 1% 2.5%
10 years 8.9% 4.5% 1.4% 3.2%
20 years 11.7% 9.5% 7.8% 8%
Source: Harvard University, as at 30 June ’09. * S&P 500/ CITI US BIG ** Trust Universe
Comparison Service (as compiled by Wilshire Associates)
Miranda, the concept of
tactical asset allocation can
play an important role.
“Late 2007 was the first
time we did it in earnest.
We had previously made
decisions such as having
no venture capital in private
equity, or no large
buyouts, or no emerging
markets. In December
2007 we made a conscious
move to add to hedged
equities and reduce long
equities, which paid off
nicely in 2008.
“In a normal market
you could have done it
either way,” says Miranda.
“With 20/20 hindsight, in
most cases you could have
stayed where you were.
But in markets such as
those in 2007 and 2008,
you do not know when
the bad news is going to
be discounted. What does
become apparent is that
various market scenarios
are discernable.”
At present the two most
likely scenarios, he says,
are that we will have a
second recession, or that we
will see steady growth of
around 4%. “You have got
to acknowledge the different
scenarios that exist and
build portfolios that straddle
them, as well as having
insurance against shock
scenarios.” For this reason
he still prefers hedged equities
to long equities.
“We also make a judgement
call on volatility. You
want to allocate to those
asset classes that make
money in volatile conditions,
such as hedge arbitrage
strategies. The same
goes for currencies. The G7
countries are all trying to
keep interest rates and currencies
down to help the
recovery of their economies.
The only beneficiaries of
that will be economies that
are not struggling – emerging
markets. The answer
to how to access them is
via emerging market local
currency debt. It is an obvious
asset allocation move.
These are examples that
volatility and an uncertain
environment can tee up.”
l Empirical evidence
Miranda notes that Harvard,
but not Yale, has taken
on board the notion that
in extreme market conditions
one needs to have
a degree of flexibility.
“Harvard attributes around
4% of outperformance to
active allocation, which is
code for tactical asset allocation,
although some of
that could include allocation
within asset classes.”
Not everyone, though,
agrees that a tactical
approach to asset allocation
works. Mike Azlen, chief
executive officer of Frontier
Capital Management,
favours a long-term stra-
VIEWPOINT TACTICAL ASSET ALLOCATION
tegic approach, which it
does passively via direct
investments in order to
achieve low costs.
Its strategic asset allocation
model is reviewed
annually, at which point
only tiny changes are
made to the asset mix.
“Our investment philosophy
is evidence-based. We
like to look at empirical
evidence and high-quality,
peer-reviewed research.
When you ask: ‘Is there
value in tactical asset allocation?’
you come up with
pretty negative answers
from both.”
l The sceptical view
Azlen notes that studies
including those by Ibbotson
show long-term strategic
asset allocation accounts
for 90% of performance,
whereas short-term tactical
allocation delivers around
2%. “This sounds good in
principle, but the tactical
changes are usually quite
small because of the risks.”
In fact, he adds, often
the impact is negative – the
positive impact of a tactical
change must be more
than the cost of making the
change. “Recent research
that looked at market timing
showed less than 25% of
decisions were right, and
there is no consistency
within a single adviser.”
The final reason Azlen
is sceptical, he says, is that
one never sees any published
information proving
the value of tactical asset
allocation. “I would say
to groups: ‘What is your
long-term strategic weighting?
If you have a committee
meeting on a quarterly
basis, show me the
changes and what impact
they had.’ If you are able
at all to do market timing it
would be a big commercial
opportunity. That is a big
motivation, but still that
fund does not exist.”
“
The G7 countries
are all trying to keep
interest rates and
currencies down to
help the recovery of
their economies. The
only beneficiaries
of that will be
economies that
are not struggling
– emerging
markets
”
Stan Miranda, chief executive,
Partners Capital
SUMMARY
The endowment funds run by
Harvard, Yale and others have
long been held up as a model
of multi-asset asset allocation.
However, the past year’s
turmoil has seen many such
static, strategic investment
funds take a hit with a 25%plus
loss on returns.
A new approach is needed,
with a more tactical approach
being added to the strategic,
long-term asset allocation
models currently in vogue.
JANUARY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
21
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