Harvard’s endowment, the world’s largest and most well known, has begun to hold exchange traded funds (ETFs) in its portfolio, and one Harvard professor believes that their endowment strategy will be an efficient plan, provided they make a few tweaks.
At the Second Annual CFA Institute Middle East Investment Conference, Andre Perold, the George Gund Professor of Finance and Banking at Harvard Business School and founder and chair of the investment committee of HighVista Strategies, contends that the forward-thinking U.S. endowment strategies of Yale and Harvard are still viable market strategies, reports John Bowman for SeekingAlpha. [5 Lessons from Harvard’s ETF Playbook.]
Perold argues that an integrated, top-down and dynamic approach to asset management is needed in today’s complex financial environment instead of the static models of yesteryear. He also believes that the Ivy League endowments need to evolve, with a focus on diversification, transport alpha and stable risk versus weight portfolio policies.
Professor Perold comments that long-term, buy-and-hold strategies don’t necessarily reduce risk since long-term risk is very unpredictable. He also notes that the conventional 60/40 weight allocation will expose a stable-weight portfolio to randomly high and low risk profiles over time. More notably, fixed-income buy-and-hold will likely have challenges in the next 5-10 years, whereas equity buy-and-hold investments may finally work again.
Instead, Perold argues for a stable risk budget policy based on a standard deviation target, citing tools like the VIX and monitoring credit default swaps as a way to provide information on short-term risk expectations.
For more information on investing in ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.