Harvard
University
’s rich (and
closely watched) endowment continues to capture stellar returns.
The $29.2 billion Harvard investment portfolio earned an annualized 10-year performance of 15.2 percent through mid-2006. That was 6.5 percentage points better than the median large institutional fund, as measured by the Trust Universe Comparison Service (TUCS).
What explains such strong performance? Simply put, Harvard’s endowment has maintained especially generous exposure to areas where it’s experienced its best gains: commodities, real estate and foreign stocks. The last asset class in particular points to the important contribution that non-domestic equities from both developed and emerging market economies have made to Harvard’s good fortune and the portfolios of other investors as well.
Are your clients’ portfolios “bilingual” in the sense that they bridge the gap between the
U.S.
economy and opportunities overseas? If not, it may be time to revisit their asset allocation. In addition to the potential that emerging markets will continue to generate strong gains, a portfolio’s risk and volatility can be reduced when foreign stocks are added to an already-diversified mix of dollar-denominated stocks and bonds.
“A second reason to add international stocks is that they are valued in native currency, which hedges investors against devaluation of the U.S. dollar,” states Richard A.
Ferri
, CFA, and founder of Portfolio Solutions. Indeed, international markets over the past several years have been boosted both by their own strong equity prices and by a weakening U.S. dollar. As a result,
U.S.
investors who were underweighted or lacked any exposure to international markets at all have done themselves a great disservice.
Back in the 1980s, Harvard’s endowment had a mix of investments that consisted principally of domestic stocks and bonds. Had the university continued on that course, it would have reaped returns well below the endowment’s financial goals. Mohamed A. El-
Erian
, who was named Harvard Management Company president and CEO in October 2005, has noted that the endowment has for more than a decade been much more broadly invested; today, he indicated, about 40 percent of its assets are “non-U.S.” holdings.
Summing up the fund’s most recent performance, El-
Erian
observed that Harvard had been well served by its campaign to progressively diversify and internationalize its endowment assets. Financial advisors can provide their clients the same diversification benefits by incorporating international and emerging market exposure from the diverse menu of exchange-traded funds (
ETFs
). During the first quarter of 2007, this menu contained a host of possibilities: 73 broad-based “international”
ETFs
and another 10 vehicles specializing in emerging market stocks.