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Tuesday, June 9, 2009

Bill Gross Criticizes The Yale/Harvard Investment Strategy (But Wait ...Wasn't His Co CIO Running Harvard Management Using This Strategy ?)

I have written several times about the perils of the Harvard/Yale endowment strategy which was copied by numerous other universities. The funds held large allocations to "alternative investments". Last year the funds not only suffered in terms of returns but also found that many lof these alternative investments are very illiquid.

my bolds

Pimco’s Gross Says Harvard, Yale May Need to Alter Investments

By Sree Vidya Bhaktavatsalam and Gillian Wee

May 29 (Bloomberg) -- Yale University and Harvard University may have to cut investments in hedge funds and private equity because the risks of holding the hard-to-sell assets outweigh the returns, said Bill Gross, co-chief investment officer of Pacific Investment Management Co.

“The Yale and Harvard portfolios, which have succeeded enormously over the past 10 or 20 years in terms of the emphasis on illiquidity and private investments and risk-taking -- you have to question that model,” Gross said yesterday at an industry conference in Chicago.

The two Ivy League schools had more than half of their endowments in hedge funds, private equity, real estate and hard assets such as commodities at June 30. Gross, who manages the $150 billion Pimco Total Return Fund, the world’s biggest bond mutual fund, recommended in March buying securities that provide stable income this year rather than more speculative and illiquid investments, as slowing economic growth and higher unemployment depress returns.

“Everything in this ‘new normal’ world should be questioned in terms of the returns going forward,” Gross, 65, told the audience at Morningstar Inc.’s annual fund-industry conference.

“New normal” in the global economy means heightened government regulation, slower growth and a shrinking role for the U.S., Mohamed El-Erian, who shares the position of investment chief with Gross at Newport Beach, California-based Pimco, said earlier this month.....

Endowment Managers

The Yale endowment is run by Chief Investment Officer David Swensen. Harvard’s endowment, managed since July by Jane Mendillo, was overseen by El-Erian from February 2006 to December 2007.

El-Erian didn’t respond to a request for comment
. John Longbrake, a spokesman for Harvard in Cambridge, Massachusetts,

Investment losses since September have forced colleges such as Harvard and Yale to freeze salaries, delay construction projects or borrow money to meet their budgets. Endowments have held onto illiquid holdings such as private-equity stakes as investor demand has waned and prices have plunged.

Yale plans for its endowment to support 44 percent of the university’s budget this fiscal year. Harvard depended on the endowment for about 35 percent of its revenue during the fiscal year ended June 30.

Decline at Yale

Yale’s endowment was valued at $17 billion in December, a decline of 25 percent since June 30. It’s the second-largest U.S. college fund after Harvard’s, which stood at $28.8 billion in December after losing 22 percent since June.

Swensen boosted Yale’s long-term returns by cutting the fund’s holdings of stocks and bonds and buying more real estate, private equity and hedge funds, a strategy that has been copied by endowment managers across the nation. His guiding principle is that the best stock and bond pickers don’t outperform bottom- rated managers by much.

Yale had 29 percent of its investments in hard assets such as oil, gas, timber and real estate as of June, according to the school’s annual report. Twenty-five percent was devoted to absolute-return strategies such as hedge funds, with 20 percent in private equity. Domestic stocks, bonds and cash made up 10 percent of its assets, while the remainder of the portfolio was held in stocks outside the U.S.

Asset Mix

Harvard had 11 percent of its portfolio allocated to private equity, 26 percent to commodities, timber and real estate and 18 percent in absolute-return strategies for the year ended June 30.
Harvard, projecting an endowment loss of as much as 30 percent this fiscal year, has frozen hiring and salaries and fired staff. Harvard raised cash by issuing $2.5 billion in bonds in December after failing to sell $1.5 billion in private- equity stakes.

About 51 percent of endowment assets was allocated to alternative investments as of Dec. 31, an increase from 46 percent six months earlier, according to a March survey released by Commonfund Institute in Wilton, Connecticut.

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