Wednesday, April 15, 2009

The Ivy Portfolio

I happened across a blog called designing better futures by Nick Gogerty.  Smart guy, and he's got a lot of interesting things to say.  

I was particularly interested in his recommendation of a book called The Ivy Portfolio.  "Ivy" refers to Ivy League colleges and in particular the endowment funds of Yale and Harvard, which enjoyed spectacular returns for many years.  I had read another review of this recently published work, and I remember thinking that the authors suffered from poor timing.  Sure, these funds had performed very well leading up to the present Big Bear market, but didn't they get crushed along with everybody else?

So I tried to find current performance info.  Because their fiscal years end on June 30, there's not a lot of hard numbers for 2008-09.  However, several articles suggest that they were down 25% in the second half of 2008, and it's unlikely that Q1 2009 showed much improvement.  

But what surprised me the most came in recalculating the numbers.  The first page of the book trumpets the number 16.62% as the annualized return for Yale's portfolio between 1985 and 2008.  By way of example, it tells us that $100,000 invested in 1985 would be worth $4,000,000 by June 2008.  OK, but what about after June?  I assumed a 25% drop in value (to $3,000,000) and recalculated the annualized return.  To my suprise, the return percentage barely budged:  it fell from 16.62% to 15.33%.  I would have guessed that it would have been a much lower number.

That's an amazing statistic that underscores the power of compounding, which has been called the Eighth Wonder of the World.  It also underscores the awesome performance of the Yale endowment.  

Generally, I'm skeptical of the Ivy plan, which seems to emphasize asset allocation as the most important determinant of investment performance.  There's plenty of academic research to support that theory, but its success is predicated on your ability to identify the right asset classes.  However, I have ordered the book, and I look forward to reading it on my vacation next week.  I'll report back to you soon.

An interesting sidelight:  One of Nick Gogerty's recent posts features a video on (which is an awesome video site-- its tag is "riveting talks by remarkable people" and you should certainly check it out)  with a presentation from the MIT Media Lab.  If you're interested in the next generation of technology, particularly stuff like smartphones and netbooks, this is well worth eight minutes of your time.  Click here.

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