Keeping up with the Joneses

By: Matt Garrott
By: Matt Garrott

The 2016 Harvard Management Company Annual Endowment Report is out.  What was once a great write-up about the cutting edge of investment management now serves as a warning that every investor can learn from.  The endowment’s fixation on keeping up with the Joneses (Yale and Stanford, especially) has led to management turnover, investment collection, and poor returns.

The endowment lost 2% over the twelve months ending on June 30, 2016. The S&P 500 was up 4% over that time while a 60% S&P 500 / 40% Barclays Aggregate Bond Index portfolio would have been up 5%.  The report blames the poor performance on everything from low interest rates to market volatility, but it looks more and more like the problem stems from trying to keep up with the Joneses.  Peer returns are even listed as one of Harvard Management Company’s three investment objectives alongside real returns and relative returns.

The endowment’s asset allocation serves as much of a signaling purpose as it does an investing purpose. Investing in hedge funds, private equity, and absolute return is a way for management to display to others their sophistication whether those strategies are additive to the portfolio or not.  As more of Harvard’s peers invest in these strategies, the novelty wears off and management must search farther afield for conspicuous sophistication.  The result: poor returns on timber plantations in Argentina (yes, really) become a major driver of negative returns for the year.

The smartest guys in the room are now trailing the dumb 60% equity / 40% bond benchmark over the last 1, 5, and 10 years. It doesn’t help that they haven’t had the same set of “smartest guys” over the last 10 years as leadership for the endowment has changed multiple times.  They are currently looking for their fourth CEO in the last ten years.  The Cleveland Browns are on their sixth head coach in the last 10 years.  This hasn’t been a winning strategy for them, either.

This is a pretty harsh look at Harvard’s recent performance. We shouldn’t focus on what this means for Harvard – they’re going to land on their feet and lead the pack again, I’m sure.  The takeaway is for investors to realize that even the best of the best can be tripped up by the same roadblocks as the rest of us.  Sticking with a financial plan rather than bailing out at the first sign of trouble is important whether you have $3 million or $37 billion to invest.  Aspirational investments like hedge funds and private equity signal conspicuous sophistication, but aren’t necessarily additive to a portfolio.  Be skeptical of people who wear their hedge fund allocations like a gaudy watch.  It is so much easier to slip up when the focus is on what other people are doing.  Instead, an investor needs to focus on their personal goals and the path that leads to them.

Fairway Scorecard 9-30-2016