Boring is Best?

James Stewart had a good column in Saturday's New York Times on the superior investment returns that small college endowments have been able to achieve relative to their larger brethren.

Over the past couple of decades, colleges have moved away from investing in publicly-traded stocks and bonds in favor of alternative assets. 

The idea was that investing in private equity and hedge fund vehicles run by sophisticated managers would be able to provide superior returns with less volatility than traditional investment strategies.

This concept was first pioneered by Yale's David Swensen.  Swensen's research suggested that investing in non-traditional asset classes provided superior long term results for patient investors.  In addition, a portfolio of alternative asset investments was less volatile than investments in publicly traded stocks and bonds.

The strong investment results that Yale's endowment produced for much of the last decade was proof that Swensen was onto something, and many other colleges and universities followed suit.

However, as more funds copied Yale's approach, returns have been gradually reduced. 

Here's an excerpt from a piece I wrote on Random Glenings on March 25, 2013:


The Yale Model became the focus of much attention on account of its performance during the tech bubble.  From July 2000 through June 2003, while the S&P 500 fell 33 percent, Yale’s endowment actually gained 20 percent.  Yale’s portfolio continued to perform well until 2008 (returns of 19.4 percent in fiscal 2004, 22.3 percent in fiscal 2005, 22.9 percent in fiscal 2006, 28.0 percent in fiscal 2007 and 4.5 percent in fiscal 2008 – through June 30, 2008).

http://rpseawright.wordpress.com/2013/03/22/is-the-yale-model-past-it/
As the article notes, the tremendous success of Swensen's approach inspired a wide variety of endowments to mimic his approach. Indeed, working with Swensen at Yale became almost a rite of passage for any chief investment officer at prestigious institutions like MIT.
More recently, returns from the Swensen approach have not proved to be as strong as in prior periods.  Indeed, the article notes that a simple 60/40 stock/bond allocation has outperformed many endowment funds that followed the Yale model:
A simple 60/40 portfolio invested 60 percent in an S&P 500 index fund and 40 percent in a fund tracking the Barclays Aggregate bond index would have gained 12.6 percent annually over the last three years and 2.8 percent over the last five years, as compared with 10.2 percent and 1.1 percent, respectively, for the average endowment.  Yale did somewhat better than the average endowment with three-year returns averaging 11.83 percent and five-year returns averaging 3.08 percent. 
What's going on here?
The authors suggest that perhaps too many institutions are investing in the same asset classes, which is dragging down overall returns.  In addition, as they parse through the numbers:
The bottom line here is that Yale’s success has been driven largely by private equity – mostly venture capital – returns.  Outside of private equity, the research suggests that Yale appeared to underperform appropriate risk-adjusted benchmarks.

http://randomglenings.blogspot.com/search/label/Investment%20Strategy?updated-max=2013-03-28T09:19:00-04:00&max-results=20&start=51&by-date=false 

Stewart's column on Saturday echoed the report that I first published last spring.

Namely, that the combination of high fees, and too many funds flocking to alternatives, has pushed returns much lower than expectations.

Here's an excerpt (I added the emphasis):
 
...The data released this week shows that small (less than $100 million) and midsize ($100 million to $1 billion) endowments — which typically have smaller allocations to alternative investments — have surged ahead of the largest endowments over the most recent three- and five-year periods. 
 

Endowments with assets under $25 million reported the highest average three-year return, at 11 percent, while those with assets between $25 million and $50 million reported the highest average five-year return, at 5.5 percent, according to the business officers association.

The largest endowments led over 10 years and longer, and Yale still holds the 10-year crown with annualized returns of 11 percent. But that’s only because the strong performance of alternative assets in earlier years supercharged its results. It’s no secret that since the financial crisis, many alternative assets have been a drag on performance. 

Hedge funds — whose owners typically charge 2 percent of assets under management and 20 percent of any gains and, in some cases, even higher — have performed dismally over the last three and five years, with annualized returns of just 3.88 percent over three years and 5.03 percent over five, according to the HFRI composite index of hedge funds. By comparison, the Standard & Poor’s 500-stock index has had annualized gains of 15.2 percent over three years and 15.34 over five. 

 

nytimes.com/2013/11/09/business/fast-growing-endowments-without-the-ivy.html?_r=0 

Now, to be sure, I think part of the problem is a matter of size.

An endowment that is less than $25 million in size really doesn't have the access to the top alternative asset managers that an institution like Yale does.  Their recent investment success may more fortuitous than sagacious.

On the other hand, the lesson for most of us may be that simplicity when it comes to investment strategies may be the best course.

Managing by Fibonacci

I am not much of a chartist when it comes to managing portfolios.

Over the years I have heard numerous of presentations by technical analysts who believe that studying charts, and finding patterns, is the best way to managing money.

Some of these technicians have been able to earn a pretty good living from using charts to trade stocks, but unfortunately I have not been able to do so consistently.

There is one exception, however, and that it when it relates to Fibonacci numbers.

Fibonnaci was a mathematician who lived centuries ago.  He discovered a series of numbers that seemed to be mathematically repeated in nature.  This video which appeared on TEDx does a good job of describing the whole concept:




At the top of this post, I have shown the movement of the S&P 500 over the past 5 years.  Included on this chart are the various Fibonnaci support and resistance levels.

Even if you are skeptical, you can see that the market does seem to move in Fibonnaci patterns.

Not necessarily a way to successfully manage money, but fun nonetheless.

Trying to Find the Winners from Obamacare

I have been convinced that the Affordable Care Act (a.k.a. Obamacare) will be a huge winner for some segments of the health care industry.

Yes, I know that the introduction of Obamacare has been a disaster, yet I believe that the problems will eventually be fixed.  In the next couple of years millions of Americans will move off the uninsured rolls, and the Romneycare that we are familiar with here in Massachusetts will be implemented throughout the land.

However, the more I talk to analysts in the health care field, the less enthusiastic I become about any opportunities for stock investment ideas.

Yesterday was no exception.

I headed over to UBS to hear from A.J. Rice, who follows healthcare providers and services stocks, as well as the managed care group.  A.J. has followed the space since 1991, and is one of the most highly regarded health care analysts on Wall Street.

The story that A.J. told was one of massive uncertainty among his companies.  No one, it seems, can figure out the details of Obamacare, and are approaching the whole implementation very cautiously.

Hospitals, for example, would seem to be one of the more obvious winners from Obamacare, since the new government program would seem to eliminate one of their most persistent expenses of covering the uninsured. 

However, A.J. notes that some of the benefits will be offset with cuts in other sectors such as Medicare reimbursement rates.  Moreover, most of the publicly traded hospital stocks have already moved sharply higher in anticipation of better earnings in 2014, so there does not seem to be any undiscovered opportunities.

On the other side, there are a number of losers in this story.  Publicly-traded diagnostic lab companies like Quest Diagnostics have already seen an erosion in their business as hospitals and doctors have been turning to internal testing solutions as a way to gain more revenues.

A.J. thinks that the HMO stocks that have less government exposure still look attractive in here.  In particular, UnitedHealth (ticker: UNH) should do well not only because of its basic business but also because a larger part of their business is (ironically) becoming a consulting business to help other healthcare companies cope with the new government programs.

UNH has just been hired to help fix the Obamacare problems - perhaps it ironically will be the best way to play this whole situation. But UNH is not cheap based on historic measures, so buying the stock here carries some risk.