This article is a follow-up to my prior article, "How to Invest Like the Pros".
In that article, I discussed how successful the Harvard and Yale endowment funds had been over the past few decades in investing their funds. These endowment funds were successful by employing different investing strategies than you will find by watching CNBC.
In brief, the Harvard and Yale endowment funds allocate a much smaller portion, than conventional wisdom, of their portfolios to US stocks and a much larger portion to overseas stocks, commodities, and other asset categories.
The latest returns from the $35 billion Harvard Endowment Fund show how their strategy works well even in a bear market. The latest results cover the period from July 1, 2007 through June 30,2008.
This is the period where the stock market entered a bear market and many Wall Street fund managers are showing returns of -10% to -20% or worse. The Harvard Endowment Fund's return was +8%! This performance was boosted greatly by the fund's 17% portfolio allocation to commodities.
This 8% return, however, is below the 15% annual return the fund enjoyed over the past decade when the fund was managed by famed money manager, Mohamed El-Erian. Mr. El-Erian left last September to become Co-CEO and Co-CIO of the famed bond mutual fund company Pimco.
At Pimco, Mr. El-Erian joins Bill Gross, who is perhaps the greatest bond investor ever. Mr. Gross is the Peter Lynch or Warren Buffet of bonds, if you will. I believe that an investor looking to allocate a portion of their portfolio to bonds needs look no further than the bond funds managed by Bill Gross at Pimco.
Mr. El-Erian has also written a book titled, "When Markets Collide: Investment Strategies for the Age of Global Economic Change." The book is not exactly the type of book you would take to the beach for light summer reading, so it is not a book for everyone.
However, if someone is interested in global economics and especially interested in how to invest in these changing economic times, it is a fascinating read. I must say, I thoroughly enjoyed it.
In the book, Mr. El-Erian details some of the profound economic changes occuring globally, especially with the billions of people in the emerging markets. The main contention of his book is that US investors have not fully grasped the impact of the changes going on in global markets and the impact of long-term higher commodity prices.
For individual investors, I believe the book paid for itself when he showed his asset allocation table for long-term investors on page 198. Here it is:
UNITED STATES - 15%
OTHER ADVANCED ECONOMIES - 15%
EMERGING EONOMIES - 12%
PRIVATE EQUITY - 7%
UNITED STATES - 5%
FOREIGN BONDS - 9%
REAL ESTATE - 6%
COMMODITIES - 11%
INFLATION PROTECTED BONDS - 5%
INFRASTRUCTURE - 5%
SPECIAL OPPORTUNITIES - 8%
I would allocate the 'weird' Special Opportunities category's 8% among the other categories.
Long-term investors, I believe, would do very well following an asset allocation strategy similar to Mr. El-Erian.