Some Improvement in Target Funds...But I'm Still Not A fan

I have written several times about the problems with target date funds. The dismal performance and the large differences between the performance of funds with identical target dates provided quite a surprise for investors who perceived these as a safe and conservative investment vehicle.

It seems the fund companies are looking to rework these funds as well indicating they weren't ready for prime time when they came to market. And what is the revolutionary idea that these fund companies are coming up with ?.....more use of low cost index instruments. The funds still have many problems with regards to transparency of the "glide path" (the way the allocation changes as the target date approaches) and how they fit into an overall investment strategy. Seems to me that most investors are far better off with their own portfolio of low cost index instruments,

The FT today on changes in the target funds. My bolds my italics

Steep losses fuel growth of passive investing

By Marianna Lemann

Published: October 4 2009 10:07 | Last updated: October 4 2009 10:07

The long-running debate over active versus passive management has emerged in the target date fund market, where a number of active managers are turning to passive strategies.

Most notably, Fidelity Investments, the number one provider of target date funds in the US by assets, recently disclosed in regulatory filings that it is planning to offer an index fund version of its target date series, known as the Freedom Funds.

Fidelity is not alone. TIAA-Cref is also about to roll out an index version of its target date fund series and Schwab has boosted its allocations to index funds held within its target date series.

Meanwhile, Morningstar reports that firms like Seligman, Nationwide, State Farm, Barclays, AIM and DWS have more than 30 per cent of target date fund assets invested in passive strategies.

The growth of passive investing in target date funds comes as steep losses have fuelled scepticism about the value of active management within the funds....

Last year’s market turmoil revealed that many target date funds had a more aggressive allocation (known as the glide path) than investors may have expected, with many 2010 target date funds suffering double-digit losses. Those losses drove investors, plan sponsors and regulators to take a closer look at how these funds are structured, managed, priced and marketed.

As part of that review, cost has become a bigger issue across the mutual fund industry and is taking strong root in the target date marketplace, says Josh Charlson, a senior mutual fund analyst at Morningstar....


“The new funds will expand the products we offer our clients to help them create the best possible retirement-plan menu for their employees,” Ms Cohen says. “We believe active and passive target date funds offer clients important advantages – strong diversification and automatic rebalancing, in a convenient package.”

The lower expense ratios are also important, says Mr Charlson of Morningstar. Active management erodes performance by virtue of higher fees and adds an extra layer of risk to target date funds.

“In 2008 it became evident that even with a glide path you could end up with losses beyond what you might expect because of a blow-up in a core bond fund,” he says.

In fact, the Standard & Poor’s index versus active fund scorecard (Spiva) suggests the higher fees investors pay for active management generally do not result in better returns. The latest Spiva scorecard, which covers a five-year period ending June 30, shows the S&P 500 outperformed 62.9 per cent of actively managed large cap funds, 73.4 per cent of mid cap funds and 57.4 per cent of small cap funds.

“There is a trend towards indexing or passive investing in the target date space and it makes sense because target date funds are part of a long-term financial plan, generally encompass a large portion of an investor’s assets and have a long time horizon,” says Doug Dannemiller, a senior analyst with Aite Group. “You don’t need alpha to satisfy that goal, you can’t plan for alpha but you can plan for cost savings.”



“I wouldn’t be surprised to see a lot of firms having multiple target date offerings,” says Laura Pavlenko Lutton, editorial director at Morningstar’s mutual fund research group.

Of course morningstar with its vested interest in serving the interests of active mutual fund managers and creating a market for the analysis of such funds sees the perfect world as one of endless complications and high fees for investors::

“Maybe you’d have one with a conservative glide path or a more aggressive glide path or all index option or all active option. We are going to see a lot more niche target date offerings that have more of a specific mandate rather than being for everyman.”

Is This Anyway to Pick A Mutual Fund ?

from the tech ticker website
my comments in italics at the end

Top Ranked Fund Manager Finds Ways to Beat the Market
Posted Sep 23, 2009 11:19am EDT by Peter Gorenstein in Investing

With the S&P 500 rallying sharply off the March lows, the key is not to, "get swept away by some of these momentum stocks and stocks that have been moving because those could turn around and end up burning people," say Bob Auer, portfolio manager of the Auer Growth Fund.

Auer preaches investor discipline and has a keen eye for fundamentals.

Thanks to his stock picking strategy the fund gained 31% in the second quarter and Lipper ranked it the #1 multi-cap growth fund over that same period....

A little bit of research shows that the fund started in December 2007 and lost 53.27% in 2008.The one year performance of -31.79 is 18% worse than the S+P 500. It has assets under management of under $150 million, many registered investment advisors have more assets under management. The management fee is 1.95% (!).

But that didn't stop other hot money chasers like Smart Money and The Street.com (Cramer vs Fund Manager video)to feature this manager.

After all this year he is outperforming the S+P 500 by 16% (after underperforming by 18% last year), Isn't that a good reason for investing in this fund ?

It Seems Like Many Not for Profits Were Pretty Creative on The Liability Side of The Balance Sheet as Well...

... and the results weren't too pretty. It seems that in addition to riskier strategies on the asset (investment) side, not for profits of all types were making use of aggressive liability management strategies and were very "good" customers of Wall Street's more creative bankers. Could it be possible that these universities with stars in their eyes and expectations of double digit returns on their assets were confident that those gains would more than offset the 4.5% interest on their new liabilities. And could it be that they were encouraged to adopt that strategy based on presentations from the investment banks ready to underwrite those bonds and sell the interest rate swaps ?


From the NYT today (my bolds and italics)

http://www.nytimes.com/2009/09/24/us/24debt.html?_r=1&ref=us

September 24, 2009
Nonprofits Paying Price for Gamble on Finances

By STEPHANIE STROM

Homeowners and businesses were not alone in taking on piles of debt over the last decade. Nonprofits of all sizes did the same, and now they, too, are paying the price.

Far from being conservative stewards of their assets, many nonprofits engaged in what some experts call risky financial behavior. “They did auction-rate securities, interest-rate arbitrage, complex swaps — which backfired on them the same way it would backfire on any hedge fund or asset manager,” said Clara Miller, chief executive of the Nonprofit Finance Fund, which has experienced a huge increase in organizations turning to it for assistance with soured bonds. “Organizations got to be all fancy-pants with their financial management.”

Those struggling now include the full range of nonprofits, including museums, colleges, orchestras and small local social service providers.

For example, Brandeis University, with $208 million in tax-exempt bonds outstanding, plans to close its art museum and sell off the collection to raise money. The Orange County Performing Arts Center, with $265 million in bonds, has laid off staff members. Copia, a culinary center in Napa, Calif., went bankrupt in December with $78 million in bond-related debt that its lawyer blames for its failure.

Even Harvard, with some $2.5 billion in tax-exempt bonds at the end of fiscal 2007, and Yale, with $1.6 billion, are cutting jobs, freezing salaries and delaying dormitory and lab construction.

While debt is the not primary reason for these institutions’ woes, the need to service it eats into their dwindling financial resources, forcing near Faustian choices. “Debt is the fourth horseman of the nonprofit apocalypse,” Ms. Miller said. “Add it to the failure of governments to fulfill contracts, declining donated revenues and a surge in demand for nonprofit services, and suddenly a lot of nonprofits are faced with some very hard choices.”

Much of the nonprofits’ debt is in the form of tax-exempt bonds. The number of charities issuing such bonds more than doubled from 1993 to 2006, according to figures compiled by the Internal Revenue Service, and the amount of debt linked to those bonds rose to $311 billion from $98 billion (adjusted for inflation to 2006 dollars).

In many cases, charities used the money from bonds to buy real estate and build facilities. Prep schools added golf courses, pools and observatories. Colleges bought entire neighborhoods and put up labs and sports facilities. Museums erected new wings, and symphonies added thousands of seats to their concert halls.

These nonprofits gambled that income from donations and investments would more than cover their debt service. But the recession turned that logic inside out.

Norman I. Silber, a law professor at Hofstra University who has done extensive research on the problem, calls the rising debt of nonprofits a “calamity.”

“If my analysis is correct,” said Professor Silber, who is also a member of several nonprofit boards, “over the next several years nonprofits across the country will have to renegotiate bond covenants, reduce services, cut staff or actually default and face foreclosures, repossessions, and in some cases, even bankruptcy.”

Before 1986, only nonprofit hospitals were allowed to float tax-exempt bonds, which they used to build new facilities. Then Congress amended the tax code to allow all charities access to the credit markets, and now even the tiny Family Service of Greater Boston has tax-exempt bond liabilities.

To be sure, the assets at nonprofits grew faster than bond-related debt. In the dozen years that ended in 2006, the value of assets held by nonprofits grew to $1.37 trillion from $347 billion (adjusted for inflation to 2006 dollars), thanks to more large gifts, increased property values, rising stock prices — and the explosion of tax-exempt debt.

“I think one could make a good argument that the greatest contributor to the enormous growth in university endowments and other endowments is not some wealthy person or persons,” said Robert L. Culver, chief executive of MassDevelopment, a state agency that supports nonprofits’ floating bonds, “but the federal government making available low-cost, tax-exempt debt that allowed endowments to remain invested and earn rates in the market as high as 25 percent.”

Traditionally, projected income determined how much debt an organization could handle, but Professor Silber suspects that as assets grew, lenders began extending credit based on how much money a nonprofit had in its endowment.

“Now, those assets have dropped in value by 20, 30 percent, but the amount of debt hasn’t changed,” he said.

Consider the case of New York Law School, which floated $135 million in auction-rate securities in 2006 in a deal that won an award for the creative use of structured finance.

The school had sold its library, on prime Manhattan real estate, for $136.5 million, but instead of building a library, it added the money from the sale to its endowment and borrowed for construction. Interest on the securities was just under 4 percent, the dean, Richard A. Matasar, said, compared with the 5.5 percent the school would have paid using ordinary fixed-rate bonds.

The Tax Code bars nonprofits from taking money raised with tax-exempt bonds and investing it in higher-yielding investments, a form of arbitrage. But it does not prohibit the strategy used by New York Law School, which many tax experts regard as a major flaw in the law.

“Congress’s intent in allowing charities to use bonds is to help them achieve their missions — build a health care center or a preschool,” said Dean Zerbe, former tax counsel to the Senate Finance Committee, “not to engage in fast and loose financial games.”

Mr. Matasar said the school did not engage in arbitrage. “The fact that we were fortunate enough to be able to sell a building to raise additional funds was a separate and distinct transaction,” he said.


I am sure the investment bankers and lawyers can back up this opinion but for the layman it is pretty clear that money is fungible. And borrowing at 4.5% and soon after increasing the size of the endowment with far higher anticipated investment income well.....if it looks like a duck, quacks like a duck...


When the credit market began souring last year, interest rates climbed sharply, hitting 12 percent in one week as buyers failed to show up for auctions of the school’s securities.

In December, New York Law School refinanced its debt, converting its securities into variable-rate notes secured by a letter of credit, Mr. Matasar said. Its endowment had fallen 20 percent to $186 million.

But experts predict that many charities, particularly cultural organizations that are seeing declining revenues, will have a harder time.

Soliciting donors to pay off debt “would be like me going to my husband and saying, ‘Give me money because I spent too much at Saks Fifth Avenue,’ ” said Naomi Levine, a former star fund-raiser for New York University who now teaches at the university’s Heyman Center for Philanthropy. “It would be very, very difficult.

and it was a strategy undertaken by smaller endowments as well:

Even the Smallest Nonprofit Groups Tried Their Hands at High Finance

By STEPHANIE STROM
Even the smallest of nonprofits ventured into the world of high finance.

A decade ago, Family Service of Greater Boston, a 174-year-old social services agency with an annual budget of about $6 million, sold its nine-story row house on Beacon Hill. Rather than use the $8.1 million in proceeds to buy a new building, Family Service put the money from the sale into its endowment and floated $8 million in variable-rate tax-exempt bonds tied to a swap contract that protected it from interest rate fluctuations.

“The thinking was that dividends and interest on the investments would be at least sufficient to make payments on the notes,” said Randal Rucker, the group’s chief executive.

In fact, investment income never sufficiently covered payments on the bonds, which ended up costing it roughly $800,000 a year — or about 12 percent of its annual budget.

Late last year, with a balloon payment on the bonds looming and its endowment’s value down by more than 20 percent, Family Service had reached what Mr. Rucker called “a very important and undesirable decision point” to lay off staff members and discontinue some programs or reduce all programs across the board.

Then it got lucky. Under a new federal program, the charity was able to refinance its bonds, reducing its debt service costs by more than half.

“I think the strategy was right back then,” Mr. Rucker said. “In hindsight, I might have done some things differently. The assumption was that the market would always give about an 8 percent return, and no one projected we would be in the situation we are now.”

Mutual Fund Investors Are Getting The Message......

....at least I hope so. Based on this wsj article they may be (finally) concluding they are better off with passive (index) instruments rather than actively managed funds. Or they could simply be chasing performance in reaction to last year's results and will be back into to active funds after a year of better returns.

In any case it seems pretty clear that one of the main points used in marketing actively managed funds proved false. Prospective investors were told active managers would protect them in down markets it proved not to be the case.Of course the WSJ can't resist implying that investors ought to be looking to reenter those active funds. My bolds and italics

WSJ:

Fallen Fund Stars Find Fewer Takers
Magellan and Others Rebound, Not Inflows



By LARRY LIGHT

Some prominent mutual funds have made spectacular comebacks this year, but the investor dollars aren't following.

Fidelity Magellan, Legg Mason Value Trust and Dodge & Cox International Stock are among the funds beating the markets again. But investors haven't forgotten their abysmal showing in 2008 and early 2009, and many funds still are hemorrhaging cash.

After pulling $172 billion from stock funds in 2008, individual investors have begun edging back. Stock-fund inflows, or net buying, are slightly positive in 2009. But the gains are going to index funds; actively managed stock funds continue to experience outflows.

By Morningstar Inc.'s reckoning, $11.6 billion in fresh investments have gone into index funds this year, versus $5.6 billion pulled out of actively managed funds overall. In 2006, when stock funds pulled in $202 billion, just 14% of that went into index funds.

"The managers didn't protect investors on the downside," says Karen Dolan, director of fund analysis at Morningstar. "So some investors have thrown in the towel."

Dodge & Cox International lost 47% in value during 2008, when the Standard & Poor's 500-stock index was down 37%.

This year, the fund has come roaring back, racking up returns of 45% (price appreciation plus dividends) versus the S&P index's 20%. The financial-services and emerging-market investments (yes, but the vanguard emerging markets etf (vwo) is up 65.5%) that hurt it last year have sprung back handily.

Nevertheless, investors have pulled out $790 million out of the Dodge & Cox fund as of mid-year, says Lipper FMI Americas. "People do follow past performance," says Charles Pohl, Dodge & Cox's chief investment officer, who says the fund's recent good renumbers will end up attracting more investments.....

is he right about investor performance or has there been some change ?

Don Rhoades, 43, an insurance agent from Greenwood Village, Colo., also dumped the Dodge & Cox overseas fund portfolio and moved into low-fee exchange-traded funds that track indexes. "Why did I pay so much to lose all that money?" he asks. Although the Dodge & Cox offering charges a not-bad 0.65% in fees, that is still more than Mr. Rhoades pays now.

At the $24 billion Fidelity Magellan, total return has soared this year by 38%. But investors have withdrawn a net $1.5 billion through August.

"We haven't changed our style or anything," says Magellan's manager, Harry Lange. His fund lost 49% last year as bets on tech stocks, among other things, went wrong.

I think he should leave that comment out of the marketing materials given investor fears of another market drop.

The managers console themselves that the current strong performances will bring investors back. "Retail investors tend to be trend followers, and come in after the fact," says Cindy Sweeting, manager of Templeton Growth, up 26% this year after a 43% clobbering in 2008. Investors have withdrawn $1.4 billion this year.

Among the hardest hit since the 2008 crunch has been Legg Mason Value. For 1990 through 2005, it beat the S&P 500 every year. Its manager, Bill Miller, became a financial celebrity and an icon of value investing who cannily snatched up many underappreciated gems.

But in 2008, his heavy holdings in financial stocks like American International Group Inc. and Bear Stearns Cos. produced a 55% loss.

The WSJ recently reported on an article that surely put into question the argument that active managers perform better than indices in down markets. In fact correlations among stocks increase in market selloffs making the purported skills of active managers less important. Although it is true that the correlation among stocks is lower in other types of markets. It does not at all argue for investing with an active manager. And it would not necessarily that the assertion that as the article proclaims "It's a stockpickers market". In fact I think I have never ever heard a single "expert" on CNBC proclaim "it's an indexers market" hmmm...I wonder why.

WSJ on that goldman study. Obviously I agree with the sections I bolded arguing against active funds.


wsj



The Return of the Stock Picker’s Market!

A recent research report from Goldman Sachs noted moderating correlation among stocks, calling it a better climate for portfolio managers. “So far, this year is proving to be a much better year for stock-pickers, with 67% of all U.S. equity funds outperforming benchmarks,” Goldman analysts wrote, citing data from S&P.
That’s something for investors to keep in mind, even though there is a long and healthy debate about exactly how much value portfolio managers actually bring to actively managed funds. Still, “if you are one who does believe that they have that ability, this is the time to begin to make allocations towards active management,” Rothman said.


Of course, picking wisely is the trick. Disparate stock performance might free up high quality stocks to rise above the pack. But it also means bad picks are more likely to lag. “You have to be able to pick the right manager,” Rothman said. “And picking the right manager is no easy feat.”

Morningstar on Harvard and Yale

They come to pretty much he same conclusions I have expressed here before (my bolds my comments in italics)



A

Are Harvard and Yale Endowments Still Top of the Class?

By Sonya Morris, CFA | 09-17-09 | 06:00 AM

Harvard and Yale recently said that their endowments experienced sizable losses for their most recent fiscal years ended June 2009....
.
....These results are noteworthy because Harvard's and Yale's endowments have produced results that have been the envy of the investment world. They also have been pioneering practitioners of what are now considered fundamental investment principles, such as diversifying among uncorrelated asset classes and developing a thoughtful long-term asset-allocation plan. Given the sterling reputations of these institutions, many thought that Harvard and Yale would fare much better than the competition amid last year's sell-off. Yet that clearly wasn't the case.
It's important not to make too much of this recent stumble. Last year's extreme market conditions humbled many talented managers, and every investor, even the most skillful ones, occasionally experiences a rough patch. However, the best investors also make a point of learning from their mistakes, and there are lessons to be taken from the endowments' recent underperformance.


Alternatives Aren't a Silver Bullet
Academics theorized that the inclusion of noncorrelated assets in a portfolio would improve diversification and enhance risk-adjusted returns. But the investment managers at Harvard and Yale were among the first to put this theory to practice by including nontraditional assets, such as commodities, real estate, private equity, and hedge funds, in their endowment portfolios. This approach proved very successful for both universities. Indeed, it worked so well that many of their fellow institutions jumped on the alternatives bandwagon. Fund firms also got in on the act by launching a bevy of mutual funds and ETFs that offer exposure to asset classes and hedge fund strategies that were previously unavailable to retail investors, such as commodities, currencies, global real estate, and absolute return strategies.

However, last year confirmed that asset classes tend to correlate during market crises. In other words, when the market implodes, few investments can avoid the downdraft.... .
Does that mean you shouldn't include alternatives in your portfolio? Not necessarily. A modest allocation to a commodity or real estate fund can improve diversification, but don't expect these investments to protect your portfolio from every unexpected turn in the market. Moreover, don't be drawn in by newfangled strategies with fetching back-tested results. The year 2008 proved just how challenging the real world can be.

Liquidity Matters
Many alternative assets held by Harvard and Yale are not readily liquid, and that proved particularly problematic last year. Harvard singled out "aggressive commitments to illiquid asset classes" as one of the factors behind its poor results last year. Private equity proved particularly insidious because not only are these investments difficult to sell, but they can demand additional investments, sometimes at inopportune times. That put private-equity investors in the position of selling their liquid positions at unattractive prices just to meet calls for capital. At the same time, some hedge funds were experiencing problems of their own and consequently limited their shareholders' ability to redeem their investments. This lack of liquidity squeezed many big investors, including university endowments....


Asset Allocation and Time Horizon Must Match

Endowment managers justified including large allocations to nonliquid assets because their time horizons were theoretically infinite. That should enable an endowment to ride out the occasional downturn without having to sell its investments at unfavorable prices....
.
The ambitious spending demands placed on endowments ultimately caused a mismatch between their asset allocations and their time horizon, which was no longer infinite. Individuals, particularly retirees, can find themselves in similar straits if they don't take realistic account of short- and intermediate-term spending needs in constructing their portfolios. Any money that you plan to spend over the next five years should be set aside in liquid and stable investments such as Treasury bonds, CDs, and bond mutual funds. Also, it's smart to set aside emergency cash reserves to meet unexpected expenses.

I'm not sure I agree with the following conclusion from Morningstar. As I have argued before, if the excess returns at these institutions was largely a premium they for taking more leverage and giving up liquidity, then (to use the flawed but still useful approach of modern portfolio theory) all they did is move along the indifference curve accepting higher risk (and less liquidity) in exchange for higher expected return. Higher risk and higher return perhaps, alpha (especially if you meand both risk and liquidity adjusted return) I'm not so sure.

Also the article conflates the strategy of using alternative investments with the Yale and Harvard strategy. I don't at all see a problem incorporating commodities through a liquid, transparent, unleveraged instrument through etfs (with the caveat that new rules by the cftc may change that view), But that is not the same as the Yale strategy which included private equity, hedge funds, venturecapia both illiquid and both leveraged.



the conclusion of the morningstar article

Focus on the Long Term
Despite large losses last year, Harvard and Yale both hold enviable long-term track records. Harvard has earned annualized returns of 8.9% over the past decade through June 2009, compared with 4.5% for the average world-allocation fund. While we don't yet know Yale's results for fiscal 2009, its 10-year record as of June 2008 was well ahead of Harvard's and was the best among all university endowments. Its estimated 30% loss for 2009, though painful, isn't large enough to derail its impressive long-term performance.
It would be a mistake to throw out an investment process that has produced these sorts of long-term results just because of one bad year. Still, last year serves as an important reminder of the limits of alternative investments and the value of liquidity

Is This Any Way To Improve the Management of A University of Endowment

The FT report on universities improving their risk management includes this convoluted prescription from (surprise) a consulting firm.(my bolds and italics)

US universities still fire-fighting
By Jay Cooper and Whitney Kvasager

Published: September 13 2009 09:44 | Last updated: September 13 2009 09:44

Markets are improving, but many foundations and endowments are still struggling to find the liquidity they need to meet their spending and cash requirements. ...


“It’s absolutely not over,” says Dick Anderson, a principal consultant and director of the endowment and foundations practice at Hammond Associates. “The liquidity issue is still very much front and centre.”

Institutional investors are taking a variety of approaches as they grapple with these lingering liquidity issues.

Redefining private equity to avoid having to sell at low prices is one way forward. The plunging equity markets caused asset allocations to be skewed, with a higher percentage in private equity than desired. But Mr Anderson says endowments can maintain their heavier private equity allocations – and thus avoid selling those positions at deep discounts in the secondary market – if they are willing to reconsider how that asset class fits into the overall portfolio.

Even before the market downturn, Hammond Associates had started combining private equity and public equity as part of a “growth equity” asset class, because the two asset classes share similar market characteristics. Consulting firm Fund Evaluation Group has a similar approach and suggests combining private equity, public equity and other investments into a “global equity” category.

If private equity and public equity are viewed as part of the same asset class, a client can keep the higher exposure to private equity and avoid rebalancing the portfolio. “Now that they have overallocated to private equity, it’s useful to understand that public equity and private equity share many characteristics,” Mr Anderson says.

Sorry, but I have absolutely no idea what these folk are talking about. Put illiquid highly leveraged private equity in the same category as liquid unleveraged equity holdings. Then when you need to rebalance and cant sell the illiquid private equity, sell the liquid public equities. But since you have defined private and public equity as part of the same asset class your asset allocation and risk measures on the portfolio haven't changed.

The consultants suggest this makes sense because private and public equity "share some of the same characteristics". I am sure they do but they also differ completely in 2 very important characteristics liquidity and leverage. High Yield bonds and Treasury bonds share many many characteristics and could be included in the same "fixed income category". If one started the year with 75% treasury bonds and 25% high yield and then sold half the treasury bonds and kept all the high yield bonds only a consultant could say that the characteristics of the portfolio haven't changed dramatically.,

Talk about a strategy guaranteed to improperly manage risk !

I am quite sure that the endowment that engages in this "strategy" for asset allocation will wind up cleaning up a big mess should we hit any kind of market selloff.

Call me old fashioned but these managers seem to be following a more logical strategy

Building up cash is another liquidity management technique. Some endowments let their cash holdings grow last year, allowing them to now rebalance areas of the portfolio that are the most out of sync with the investment policy. That is what Michael Sullivan, chief investment officer at Minnesota’s University of St. Thomas, has done.

Mr Sullivan simply held on to cash as it became available last year – through donations, manager terminations and other events, such as a fund of hedge funds manager closing and returning cash. Cash is now about 16 per cent of the $400m (£214m, €274m) portfolio; the investment policy holds cash at zero.

“We weren’t trying to time anything; it was a by-product. We just had cash and we didn’t know what to do so we kept it as cash,” Mr Sullivan says.

“From a strategic point of view, cash should always be minimised. It was just that this was such an abnormal time,” Mr Sullivan says. “We are not changing our strategy to have large amounts of cash.”

Maybe the consultants feel they are not doing their job if they recommend a strategy as commonplace as keeping a large cash reserve.

The consultant seems to be feeding his client a classic bad idea: increase the allocation to risky strategies in an effort to quickly make back lost money:

Some investors are allocating to opportunistic fixed income managers, hoping for higher returns with less risk.

The potentially higher returns can then help meet future capital commitments, and can also help avoid future equity downturns – an appealing prospect given that it was the market crash that helped cause some of the liquidity problems over the past year.

Mr Anderson notes a host of recently launched strategies from managers “who will opportunistically take on risk, but who share the client’s need for protecting the downside”.

These managers invest in a range of credit opportunities including high-yield, structured credit, agencies and senior bank debt.

It seems like the consultees have a better handle on things thant the cosultants:

Last, but not least, foundations and endowments are looking ahead to forestall future liquidity problems. At the $150m Ball State University Foundation, chief investment officer Thomas Heck has created a detailed 12-15-month cash flow projection so he can see when cash will be needed and how much.

“We’re doing an asset allocation kind of approach to liquidity. We’ve gone through and classified our investments based on days, months, quarters, limited partnerships,” he says.

“Within each asset class, I include a liquidity breakdown so we can see where the liquidity problems may be from a rebalancing standpoint.”

A Very Interesting Graph

from the Financial Tines Sept 12/13 edition (click to enlarge)

two Observations

1. The curve here is not "bell shaped". Large magnitude moves are far more common on the downside than on the upside. And of course for most individual investors (who don't engage in shorting) the downside moves are those that they are concerned about.

2. A gain of the magnitude that has occurred over the past 6 months has occurred only .5% of six month periods . In other words an investor who was out of the market for the past six months missed what was literally a once in a lifetinme opportunity. Such a move has not occurred since the 1932-1933 period.