1 / 9

November 26, 2007

Qatari Businessmen’s Association Investment Fund Conference 2007 “Harvard vs Yale: Internal vs External Investment Management Styles”. November 26, 2007. 1) The Contrast of Styles. What do you want to build?

Download Presentation

November 26, 2007

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Qatari Businessmen’s Association Investment Fund Conference 2007“Harvard vs Yale: Internal vs External Investment Management Styles” November 26, 2007

  2. 1) The Contrast of Styles • What do you want to build? • Internally managed operation: Harvard has 120 investment professionals managing 65% of their capital • Externally managed operation: Yale has 20 investment professional who have allocated 100% of their capital to external funds • Do you want to pursue the quest for alpha? • Active management – try to beat the indices • Passive management – index and asset allocation • The sources of returns: • Asset Allocation • Manager Selection • Leverage • FX • Sector Allocation • Security Selection • A key success factor: do things differently • Both Harvard and Yale embrace alternative investments well before it was customary to do so and had much larger allocation to those asset classes

  3. 2) Effectiveness • Completely different skill sets: • Harvard: picking securities • Yale: picking people • Key issues to consider in the Internal vs External approaches • Minimum Efficient Scale • Agency Cost • Optionality of Capacity • The Problem of the One-Way Ratchet • Reputational Issues • Seeding Risk • Costs • Track records (1985-2007) • Both endowments outperformed the average endowment by ~500bp per annum over a 20 year period.

  4. 3) Key Questions for any Investment Model • What is your investment objective? • Asset allocation: what is the right mix of asset classes? • Risk vs Volatility • Diversification • Market/sector movements account for 70%+ of returns of most funds. • Differential results by asset class: In some asset classes, the spread in returns between the Top Quartile and the Bottom Quartile • is vast (REITs, Private Equity), • in others it’s inconsequential (bonds)

  5. 3) Key Questions for any Investment Model (cont) • Investment managers: how do you identify skill? • Intellectual flexibility • You need to find managers who can make money through a series of market conditions. • The Lake Wobegone Problem • The greatest challenge is knowing what risks were taken to produce the results. The best performer last year is not necessarily who you want to back. • Luck vs Skill: You need to understand the processes that produced those results. How did they sourced the idea and do the research? Is their process/strategy scalable? • Consistency: second quartile performance every year = top decile over time.

  6. 4) Capacity • The Groucho Marx Problem: The challenge is identifying those managers early and being able to get sufficient capital into those funds. • Balance between analytical resources and being nimble • There is a lot of capital chasing a small number of highly skilled investors.

  7. 5) Internal Asset Management • To a greater degree, there is more flexibility in asset allocation decisions. • However, there are a lot more questions and a lot more headaches. • You don’t have as much of a capacity issue, but you have to build a high performance organization.

  8. 6) The Barriers to Success • Stable investment/leadership team: It is near impossible to build a performance organization without stability in the core leadership team • Deep analytical training: This is an apprenticeship business; processes and mental models need to be learned early • Prudent risk-taking needs to be encouraged • Failure needs to be accepted (and encouraged) • Batting average vs slugging average • Bar bell theory • Scale to do all the work that is necessary • Nimble enough to exploit it • Flexibility of mandate: To go where opportunity is most bountiful and sit on cash if the well runs dry. • Stable capital base

  9. 7) Our Advice to QBA • Invest in building these relationships now. • It takes years to find the right partners that you can trust. It may take engaging dozens of managers to find the one or two that will make sense for you. • David Swensen (Yale) ensured superior ongoing results by being early in his funding of several world class funds. He now has a permanent advantage over other endowments; he can still get capacity into skilled firms that others cannot. • Use stable capital as an advantage. • Capital is plentiful but it can be differentiated • The right capital, ie long-term focused capital that allows the investment managers the opportunity to exploit their skills, is very valuable. • Study the models to find one that fits you

More Related