Oxstones Investment Club™By Dan Caplinger, Motley Fool,
Exchange-traded funds have become a favorite tool for individual investors. But big institutions have moved into ETFs in a big way as well, and following what they’re doing can give you some insight into things you should consider doing for your own portfolio.
Among college endowments, none is bigger than Harvard University’s. As of June 30, Harvard’s endowment had a total value of $27.4 billion, posting an 11% advance after losing more than $10 billion during the fund’s 2008-09 fiscal year.
As the largest endowment, it’s natural to be curious what Harvard’s doing with its money. Fortunately, the Harvard Management Company files a list of its public holdings with the SEC every three months, giving you an inside look at the investment strategy that the Ivy League giant is using to make its money go as far as it can. Let’s take a closer look.
The Ivy League portfolio
As you’d expect from such a large institution, Harvard’s endowment fund holds a number of different positions in its portfolio. As of Sept. 30, the fund listed 126 different securities on its quarterly SEC filing. Among those holdings are a number of individual stocks from industries throughout the economy.
What struck me as interesting was the sheer number of ETFs the portfolio includes. I counted more than two dozen exchange-traded products in the listing. Here are the ones that represented the largest investments in Harvard’s filing.
| ETF | Value of Harvard Position |
|---|---|
| iShares MSCI Brazil (NYSE: EWZ) | $320.7 million |
| iShares FTSE Xinhua China (NYSE: FXI) | $273.9 million |
| iShares MSCI South Korea (NYSE: EWY) | $108.1 million |
| iShares MSCI South Africa (NYSE: EZA) | $70.1 million |
| iShares MSCI Mexico (NYSE: EWW) | $61.5 million |
| iShares MSCI Emerging Markets (NYSE: EEM) | $43.3 million |
| WisdomTree India Earnings (NYSE: EPI) | $32.7 million |
Source: SEC filings. Value as of Sept. 30.
Obviously, international investing generally — and emerging-markets investments in particular — plays a huge role in Harvard’s public portfolio. What can you learn from the Harvard approach?
Lesson 1: Get a little of everything
Despite its international focus, Harvard’s portfolio shows a commitment to diversification. You’ll find everything from commodities to U.S. stocks to real estate investment trusts, and the stocks aren’t particularly concentrated in any one area of the market.
In fact, because the disclosed list of public holdings is just a small part of Harvard’s overall endowment — the filing adds up to just $1.5 billion, barely 5% of the endowment’s total assets under management — you can bet that the overall portfolio is even more diversified.
Lesson 2: One size doesn’t fit all
For individual investors, simplicity is often the primary consideration. So rather than having a whole bunch of different ETFs covering individual countries, plenty of investors would have simply gone with a broad-based ETF that allocates percentages of assets to countries around the world.
When you’re a sophisticated investor, however, the percentages that those broad funds pick for you don’t necessarily meet your needs. From the array of funds focusing on China, India, and Brazil, as well as less-followed small markets such as Turkey and Chile, it’s clear that Harvard has its own philosophy with respect to allocating its money to various parts of the world.
Lesson 3: Take advantage of closed-end funds
With its prominence, Harvard could easily rely on highly liquid ETFs for its investing exposure. But prominently among its holdings are several closed-end funds, ranging from the broad-based Tri-Continental to foreign-focused funds like India Fund and Korea Equity Fund.
When you drill down on these closed-ends, you’ll find that many of them trade at significant discounts to their net asset value. With a long time frame, Harvard can afford to wait for market conditions to close those gaps — and if you have the same long-term perspective, it’s worth considering for your portfolio, too.
Don’t be Harvard-stupid
Harvard has a reputation for putting academic knowledge above practical know-how, but its investing philosophy has useful hands-on lessons for you. You don’t even need $50,000 a year to learn them. Just keep your eyes out for the endowment’s regular filings and see what moves they and other big institutions are making with their money. (You can find SEC filings using the commission’s EDGAR system, starting at this link.)
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