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(continued from front flap) $49.95 USA / $59.95 CAN Praise for Faber The Ivy Portfolio also showcases a method to piggyback THE IVY PORTFOLIO the stock-picking abilities of top hedge funds, allowing Richardson “We all know that the most impressive investment returns are from endowment funds and in particular, investors to achieve greater success by following the Yale and Harvard. Faber and Richardson take us inside these two funds and show us how to replicate valuation insights of the smart money. that model for our portfolios. The Ivy Portfolio is an easy-to-read and -understand book that will make the process of asset allocation and investment easier for readers. And in light of the recent market The Ivy Portfolio will show investors exactly how all turmoil, its lessons are even more important.” this can be accomplished—and allow them to achieve an unparalleled level of investment success —John Mauldin, author of the bestselling Bull’s Eye Investing and the weekly newsletter How to Invest Like the Top Endowments and Avoid Bear Markets and Avoid Endowments Like Invest to the Top How in the process. Thoughts from the Frontline Mebane T. Faber “Meb Faber makes a most compelling case for quantitative active asset allocation. Investors of all levels THE Over the past twenty years, the Yale University of sophistication will benefi t handsomely from the insights and analyses presented in The Ivy Portfolio.” Eric W. Richardson and Harvard University endowments have MEBANE T. FABER, CAIA, CMT, is the Portfolio achieved unprecedented investment success. Since 1985, Manager at Cambria Investment Management where —Rob Arnott, Chairman, and Jason Hsu, Chief Investment Offi cer, Research Affi liates; the Yale University endowment returned 16.62% per year, he manages equity and global tactical asset allocation coauthors of The Fundamental Index: A Better Way to Invest easily surpassing the S&P 500 Index’s 11.98% return. portfolios. He is a frequent speaker and writer on “Analysis of institutional holdings (13F analysis) is one of the most useful yet underused tools in an The Harvard University endowment returned over investment strategies and authors the World Beta THE investor’s research arsenal. Along with taking readers into the arcane world of endowment investing, IVY 15% a year—and both endowments achieved these blog. Faber is also the cofounder of AlphaClone, an The Ivy Portfolio provides actionable advice on how to trade alongside the top investment professionals results with signifi cantly less volatility than the S&P 500. investing research Web site. Faber began his career of our time.” as a biotechnology equity analyst and a quantitative —Justin Walters, cofounder, Bespoke Investment Group LLC Despite the general success of the top endowments, research analyst. He graduated from the University of 2008 proved diffi cult for many buy-and-hold investors Virginia with a double major in engineering science PORTFOLIO as well as the endowments. Many asset classes fi nished and biology. the year with declines of 30% or more. ERIC W. RICHARDSON, JD, is the founder A do-it-yourself guide to investing like the renowned PORTFOLIO The Ivy Portfolio shows how individual investors can and CEO of Cambria Investment Management. He Harvard and Yale endowments. mimic the stellar long-term investment track records also serves as the President of the General Partner of of these top endowments while avoiding bear markets Cambria Investment Fund, LP, a private investment The Ivy Portfolio shows step by step how to track and mimic the investment strategies of the highly like 2008. partnership that makes bridge loans and structured successful Harvard and Yale endowments. Using the endowment Policy Portfolios as a guide, the How to Invest Like the equity investments in emerging-growth companies. authors illustrate how an investor can develop a strategic asset allocation using an ETF-based The Ivy Portfolio begins by examining the theory, He began his career as an associate with the law fi rm investment approach. Top Endowments and process, and discipline behind the success of the Yale Milbank, Tweed, Hadley & McCloy. Mr. Richardson The Ivy Portfolio also reveals a novel method for investors to reduce their risk through a tactical asset University and Harvard University endowments. received a BA from the University of Southern allocation strategy to protect them from bear markets. The book will also showcase a method to follow It demystifi es the techniques that the ivory-tower California and a JD from the University of Michigan the smart money and piggyback the top hedge funds and their stock-picking abilities. With readable, Avoid Bear Markets academic practitioners use to manage their portfolios Law School. straightforward advice, The Ivy Portfolio will show investors exactly how this can be accomplished— and shows step by step how an individual investor can and allow them to achieve an unparalleled level of investment success in the process. hope to duplicate their returns using an innovative With all of the uncertainty in the markets today, The Ivy Portfolio helps the reader answer the most often ETF-based investment strategy. asked question in investing today—“What do I do?” The Ivy Portfolio then demonstrates a simple tactical Jacket Photograph: © Jupiter Images asset approach to dampen the impact of bear markets on long-term investment results. The model would have protected an investor from the carnage of 2008, all while eliminating the uncertainty and emotions of investing. (continued on back flap) ffirs.indd iv 2/13/09 10:36:22 AM The Ivy Portfolio How to Invest Like the Top Endowments and Avoid Bear Markets Mebane T. Faber Eric W. Richardson John Wiley & Sons, Inc. ffirs.indd i 2/13/09 10:36:21 AM Copyright © 2009 by Mebane T. Faber and Eric W. Richardson. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data Faber, Mebane T., 1977- The ivy portfolio: how to invest like the top endowments and avoid bear markets Mebane T. Faber, Eric W. Richardson. p. cm. Includes bibliographical references and Index. ISBN 978-0470-28489-6 (cloth) 1. Portfolio management. 2. Investments. 3. Institutional investments. I. Richardson, Eric W., 1966- II. Title. HG4529.5.F333 2009 332.6—dc22 2008034565 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd ii 2/13/09 10:36:22 AM To Gama and Boondock To my parents, Larry and Marilyn Richardson A portion of all book proceeds will go to local animal rescue shelters. ffirs.indd iii 2/13/09 10:36:22 AM ffirs.indd iv 2/13/09 10:36:22 AM Contents Preface ix Acknowledgments xi Part One: Constructing Your Ivy Portfolio 1 Chapter 1 The Super Endowments 3 Endowments Are Different 4 Size Matters . 8 . and So Does Performance 11 Active Management over Passive 14 Summary 16 Chapter 2 The Yale Endowment 17 History of the Endowment 18 David Swensen’s Ascent 22 Of Alphas and Betas 30 Outlining the Yale Process 33 Domestic Equity 34 Foreign Equity 35 Fixed-Income 37 Real Assets 37 Private Equity 38 Summary 39 Chapter 3 The Harvard Endowment 41 History of the Endowment 42 The Owner’s Mentality 43 ftoc.indd v 2/13/09 10:38:07 AM vi contents Harvard’s Swensen 45 More Money, More Problems 48 How Harvard Does It 50 Summary 53 Chapter 4 Building Your Own Ivy League Portfolio 55 Do as I Do—Shadowing the Super Endowments 56 Risk-Adjusted Returns 64 Do as I Say 66 Infl ation Is the Enemy 68 Creating an All-Weather Policy
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