CONTINUED FROM FRONT FLAP $27.95 USA / $33.95 CAN Aft er this informative introduction: • Part II details the diff erent investment vehicles—separately managed accounts (SMAs), exchange traded funds (ETFs), mutual funds, hedge funds, and structured products—you can use to ARGE UNIVERSITY ENDOWMENTS create an endowment type of investment like Harvard and Yale have always had portfolio to be more innovative than most institutional • Part III highlights the various asset classes “How Harvard and Yale Beat the Market is a must-read for anyone managing investors, as they have an almost impossible and strategies—from stocks, managed his own or other people’s money. It demystifi es new investments such as hedge investment mandate—generate a large enough futures, and private equity to portable real return (return aft er infl ation) so the en- alpha—you may want to consider for your funds and principal-protected products. Th is engaging handbook belongs in dowment can spend money and avoid risks that portfolio every investor’s library.” %% could subject the endowment to any losses. • Part IV takes what you’ve learned and shows you how to apply it when designing DEBORAH WEIR, Parker Global Strategies, author of Timing the Market: % By thinking outside the box about how a portfolio your own portfolio How to Profi t in the Stock Market Using the Yield Curve, Technical Analysis, should be managed, many endowments have out- performed the market over the years. Now, with Large university endowments like Harvard and and Cultural Indicators How Harvard and Yale Beat the Market, you’ll Yale have revolutionized the investment land- & become familiar with the endowment philoso- scape. Following in their footsteps can deliver phy of investing and discover how to structure In today’s volatile market, investors are looking for new ways to lower their risk consistent performance through superior money your individual investment endeavors around an manager selection, asset allocation, and portfolio profi le. For author Matthew Tuttle, the best means of achieving this goal is to endowment-type portfolio. construction. With How Harvard and Yale Beat look towards large university endowments—which attempt to capture consistent the Market, you won’t need a multimillion-dollar Author Matthew Tuttle has been involved with portfolio to invest like an endowment because returns while maintaining a low level of risk. the markets in one way or another for almost you’ll have the insights and understanding to take two decades. During this time, he’s developed an on the market at a much more personal level. in-depth understanding of how large university How Harvard and Yale Beat the Market explores the benefi ts of endowment endowments work and created portfolios for investing and shows you how to structure your individual investment endeavors clien ts based on their investment strategies. With MATTHEW TUTTLE, CFP, is a partner in the How Harvard and Yale Beat the Market, he shares Private Client Group, LLC, and the President of around an endowment-type portfolio. While the average investor doesn’t his extensive experiences with you and puts this Tuttle Wealth Management, LLC (an investment have access to many of the money managers and vehicles that high-profi le proven approach in perspective. management strategic alliance of the Private Client Group, LLC). He has been interviewed on endowments use, you can still learn from the investment strategies outlined Divided into four comprehensive parts, How Har- CNBC and CNNfn, and is a frequent contributor to here and implement them in your own investment activities. Filled with timely vard and Yale Beat the Market addresses every- Forbes.com, the Wall Street Journal, SmartMoney, thing from basic endowment investing principles tips and practical advice from an expert who designs portfolios based on and Dow Jones Newswires. to integrating endowments’ ideas into a profi table endowment investment strategies, How Harvard and Yale Beat the Market portfolio. But before Tuttle talks about how you will put you in a better position to achieve investment success. can invest like an endowment, he discusses the JACKET DESIGN: CHRIS WALLACE current fi nancial environment and its implica- ALL JACKET IMAGES COURTESY OF ISTOCKPHOTO WHAT INDIVIDUAL INVESTORS CAN tions for investors in Part I. In doing so, Tuttle AND THE ARTIST: RETRO VARSITY PENNANT explores why investors make the mistakes they do ©STEFAN KLEIN, OLD PAPER © PAUL HART, LIONS SHIELD AND BANNER © KYCSTUDIO and how you can avoid them. He also begins to LEARN FROM UNIVERSITY ENDOWMENTS TO lay the groundwork for thinking about your port- folio the same way endowments do, by examining HELP THEM PROSPER IN AN UNCERTAIN MARKET the issues of endowment portfolio theory, true diversifi cation, and skill-based money managers. CONTINUED ON BACK FLAP c01.indd 2 2/13/09 6:55:28 PM How Harvard and Yale Beat the Market WHAT INDIVIDUAL INVESTORS CAN LEARN FROM UNIVERSITY ENDOWMENTS TO HELP THEM PROSPER IN AN UNCERTAIN MARKET Matthew Tuttle John Wiley & Sons, Inc. ffirs.indd i 2/13/09 6:52:05 PM Copyright © 2009 by Matthew Tuttle. 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 specifically disclaim any implied warranties of merchantability or fitness 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 profit 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: Tuttle, Matthew, 1968– How Harvard and Yale beat the market : what individual investors can learn from university endowments to help them prosper in an uncertain market/ Matthew Tuttle. p. cm. Includes bibliographical references and index. ISBN 978-0-470-40176-7 (cloth) 1. Investments—United States. 2. Harvard University —Endowments. 3. Yale University—Endowments. 4. Institutional investments—United States. 5. Portfolio management—United States. I. Title. HG4910.T88 2009 332.6—dc22 2008047056 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd ii 2/13/09 6:52:05 PM Contents Acknowledgments v Introduction: Why You Should Invest Like an Endowment vii Part I: Investment 101: An Introduction to the Endowment Philosophy of Investing Chapter 1 The Current Environment and the Need for New Thinking 3 Chapter 2 Common Investment Mistakes 13 Chapter 3 Diversification: The Best Investment Strategy 25 Chapter 4 Skill-Based Money Managers versus Style Box-Based Money Managers 35 Chapter 5 Introduction to the Endowment Philosophy 53 Chapter 6 Why Large Endowments Outperform the Market and How You Can, Too! 63 Part II: Investment Vehicles Chapter 7 Mutual Funds, Separately Managed Accounts, Exchange-Traded Funds, and Exchange-Traded Notes 79 iii ftoc.indd iii 2/13/09 12:42:12 PM iv Contents Chapter 8 Structured Products 89 Chapter 9 Hedge Funds and Funds of Funds 97 Part III: Endowment Asset Classes and Investing Strategies Chapter 10 Absolute Return 121 Chapter 11 Stocks 129 Chapter 12 Bonds 139 Chapter 13 Real Assets and Commodities 151 Chapter 14 Managed Futures 165 Chapter 15 Private Equity 177 Chapter 16 Managing Some of Your Money In-House 185 Chapter 17 Portable Alpha 197 Part IV: Designing Your Portfolio Chapter 18 Suggested Allocations 211 Chapter 19 Choosing and Managing Money Managers 217 Chapter 20 Putting It All Together 227 Chapter 21 Putting It in Writing: The Investment Policy Statement 243 Final Thoughts 259 Appendix: Key Terms 261 About the Author 269 Index 271 ftoc.indd iv 2/13/09 12:42:12 PM Acknowledgments I want to sincerely thank the following people who made enor- mous contributions to this book: • My agent, Carole Jelen McClendon, for making this project a reality • My mother, Cheryl Tuttle, and Adam Bluestein who helped me edit the book • Sherry Carnahan who helped with graphics • All of the mutual fund companies that provided me facts and figures, including Ivy Funds, DWS - Scudder, and Riversource Most importantly I want to thank my daughter Cameron, and my sons, Jared and Braden, for tolerating the late nights and week- ends that I spent working on this book.