A Clone for Every Investor - Part 1: Endowments

One of AlphaClone's most versatile features is the ability to create new fund groups around investment themes. To show how this works, we launched three new fund groups two weeks ago, each around a specific investment theme. The three groups are: Endowments: in honor of Mebane Faber's new book "The Ivy Portfolio" we created a fund group that combines five of largest university endowments Value Masters: combines eighteen of the worlds top value investors. International: includes all hedge funds in our database but with their positions screened for just ADR holdings. We'll be covering each group in more depth starting this week with the Endowments Fund Group, then next week we'll cover Value Masters and finally our International fund group. For now, we present AlphaClone's Endowments Fund Group. Mebane Faber makes a convincing case in his new book "The Ivy Portfolio" that if diversification across asset classes is what you seek as an investor, you'd be hard pressed to find a better template than the stock portfolios of university "super endowments". Indeed a look at the backtested performance of AlphaClone's Endowments group is very instructive. The five endowments in the group are: Harvard Yale Princeton University of Texas Stanford Lets take a look at the group's Top Three Holdings Clone. Remember that this is a clone, which means we're investing quarterly in the underlying holdings at the time they are disclosed publicly and our Top Three Holdings strategy means we're investing quarterly in the three largest holdings from each fund (endowment in this case) in the group. The first thing that is noticeable right away is that 12 of the 15 holdings are in either ETFs or REITs making this clone a great candidate for investors who desire index investing. Secondly, to drive our point about diversification home, the 15 holdings are spread out across 9 different world geographies and/or industry sectors with little overlap. Emerging Markets (EEM*, VWO) 3 US (IVV, SPY) 2 Europe (EFA*) 2 REITs (AKR, DEI) 2 Communications (T, VZ) 2 Global (IOO) 1 Brazil (EWZ) 1 China (FXI) 1 Oil (XOM) 1 Total # of holdings 15 *held by more than one endowment - note the clone's holdings will change on 5/22/09, our next rebalance date. How does the clone perform? Since 2000, the clone has returned an annualized 9.7% versus the S&P 500TR index which has returned a negative 3.6% annualized. Here are the results across various performance and risk measures: 1/3/2000 to 5/1/2009 Clone S&P 500 Annualized Return 9.70% -3.60% Total Return 137.50% -28.9% Volatility 19% 16.2% Max Drawdown -53.70% -50.9% Sharpe (4%) 0.30 (0.50) Finally, here is what the clone holds currently. You can subscribe to AlphaClone (currently 50% off through 2009) to view this clone's holdings at our next rebalance date which will be on 5/22/09. 1 EEM iShares MSCI Emerging Markets Index Harvard University 2 FXI iShares FTSE/Xinhua China 25 Index Harvard University 3 EWZ iShares MSCI Brazil Index Harvard University 4 XOM Exxon Mobil Corp Princeton University 5 T AT&T Inc Princeton University 6 VZ Verizon Communications Inc Princeton University 7 EFA iShares MSCI EAFE Index Stanford University 8 EEM iShares MSCI Emerging Markets Index Stanford University 9 IVV iShares S&P 500 Index Stanford University 10 VWO Vanguard Emerging Markets Stock ETF University of Texas 11 IOO iShares S&P Global 100 Index University of Texas 12 SPY SPDRs University of Texas 13 DEI Douglas Emmett Inc Yale University 14 AKR Acadia Realty Trust Yale University 15 EFA iShares MSCI EAFE Index Yale University One of the challanges of matching the asset allocation strategies of top endowments is that for most investors there is no investable proxy for some of the asset classes in which endowments invest, such as private equity, private partnerships and hedge funds. The clones above are based on an endowment's equity holdings only. One interesting thought that we think is worth at least another article is to take a clone based on a pure hedge fund theme (e.g., Tiger Cubs) and combine it with the above Endowment investment themes to form a more "complete" Endowment clone. With AlphaClone, testing that prospect is only seconds away!