For years, I've been saying that investors cannot replicate endowments like Yale and Harvard and get decent results with brokerage accessible products. Is my opinion incorrect though? Maybe. Here's the latest about Harvard from Bloomberg that included this chart of the asset allocation. Black is 2023.
It's not that someone could not copy the asset class exposure, just that the return streams would not look the same and often, various forms of sophistication replication does not really work in fund form. The allocation chart is interactive in the article and says that public equity is 11%, private equity is 39%, hedge funds 31%, real estate 5%, natural resources 1%, bonds tips 6%, other real assets 2% and cash 5%.
I built two version of this allocation with the only difference being that in Portfolio 1, for private equity I used Apollo Asset Management (APO) and in Portfolio 2 I used the Invesco Global Listed Private Equity ETF (PSP). The mix of issues I used for this exercise were chosen primarily to allow for a decently long period to back test.
Portfolio 3 is the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. STPZ is a client holding.
The performance dispersion between Portfolios 1 and 2 is dramatic and is accounted for with the huge weighting to either APO which has dramatically outperformed over the long term, albeit with a lot of volatility, or PSP which has been a real stinker. From the start of 2012, Yahoo has APO up 609% and PSP up 22%. If you ran this using Blackstone (BX), the test goes back just as far and the result is reasonably close the the portfolio using Apollo. If you use KKR instead, that result lags noticeably behind the Apollo version but does much better than the PSP version and outperforms VBAIX.
Like I was saying, the replication ETFs don't always work so well. So who wants to sign up for 39% into one stock that is far more volatile than the S&P 500? You could go 13% into each of the three (APO, BX, KKR) and you'd outperform VBAIX by a lot but with a much higher standard deviation.
Under the hedge fund allocation I used QAI just because it has been around for a long time but there are now many more hedge fund strategies available in exchange traded products or mutual funds that would allow for better returns than QAI with similar volatility profiles. Adding return in the hedge fund allocation might allow for doing something different with the private equity allocation like maybe putting a lot more into public equity allowing for a much smaller slice into one of the private equity stocks, while avoiding PSP.
A funny note about PSP. I wrote about it a couple of times for TheStreet.com, most recently on May 22, 2007. The title of that article was Buyout Bust? Steer Clear of Private Equity ETF. Ok, I didn't like then, it's been a stinker and I would still avoid it.
Just because I would not try to replicate the Harvard Endowment doesn't mean there are not interesting things to observe and taking the long term view, maybe incorporate in a different manner. Harvard has avoided, or at least is very underweight fixed income duration which is a drum we bang here constantly. Hedge funds as a form of alt is intriguing to me of course even if I build it differently. And maybe I shouldn't be so dismissive of names like APO and BX but it would take a lot to really warm me up to those names.
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