I read a good article recently on how to construct an Ivy League fund using exchange-traded funds (ETFs).
The original article was for American investors. Here’s how British readers can do the same thing.
But why would you want an Ivy League style fund?
Well, the endowment funds of Ivy League universities like Yale and Harvard have historically achieved excellent returns, with less volatility than an index tracker.
Their success is partly because of special opportunities we can’t easily replicate, such as access to good hedge funds.
But they’ve also done well because of asset allocation, which we can copy with ETFs.
The model we’ll be following is that of David Swensen, who is Yale’s fund manager. (I’ve previously sung the praises of Swensen’s book Unconventional Success, which is well worth reading).
Swensen had posted an average return of 16% a year for 21 years, as of 2006. This makes him the best university endowment manager in the world.
Swensen’s Ivy League portfolio via UK ETFs
In place of the U.S. ETFs, I’ve selected from the Barclays iShares range of London-listed exchange-trade funds.
Each ETF’s stock market ticker is given in brackets.
The Swensen model portfolio
- Domestic Equity (30%): FTSE 100 / FTSE 250 (ISF / MIDD)
- Emerging Market Equity (5%): MSCI Emerging Market Equity (IEEM)
- Foreign Developed Equity (15%): FTSE Developed World (IWXU)
- Property (REITs) (20%): FTSE EPRA/NAREIT UK Property (IUKP)
- U.K. Government Bonds (15%): FTSE UK All Stocks Gilt (IGLT)
- U.K. Inflation-Linked Bonds (15%): £ Index-Linked Gilts (INXG)
A few thoughts on this ETF portfolio
The Ivy League ETF portfolio has some clear advantages to UK investors:
- Well-diversified
- Cheap to run
- Liquid
- Very simple to set-up
- Easy to rebalance
Would I put my money into it right now? Well, I haven’t done so, which answers the question.
Partly that’s because I’m foolish, and do risky things like invest in small caps.
But also I think equities look really good value at the moment, whereas I suspect Government bonds are still expensive, although maybe not in a bubble anymore.
The whole point of asset allocation is you ignore these sorts of hunches, however, so that’s something to keep in mind.
As the original ETF Database article says:
Several Ivy League endowment managers have consistently beat the market by a large margin, with billions of dollars at stake. Of course, this is made possible partly because many investing instruments are available to larger institutional investors that retail investors cannot access. But according to these managers, the trick for individual investors isn’t active trading: it’s better asset allocation.
As a simple asset allocation goal to aim towards over the next few years, I think the Ivy League endowment portfolio via ETFs has much to recommend it.
Update August 2010: I’ve now written a second article on the Ivy League portfolio, modifying it in light of its past performance and some further comments by David Swensen.
Remember to take professional advice if you need it before making any investments.
The portfolio looks broadly sensible, but I think it may have too much weight on the UK domestic market. For Swensen “domestic equity” means the US equity market, which has about one third of the world’s capitalisation. In comparison the UK market is only 6%. This would suggest reducing the domestic equity allocation and increasing the foreign developed allocation.
But am I right in remembering that you’ve previously argued that the UK market has so much exposure to foreign companies that investors don’t really need to diversify across equity markets?
Very sensible point about the UK market scale versus the US market. There are less global titans, too. I’ve seen it said before by some passive ETF portfolio guru (I think maybe Bogle) that the UK domestic equity portion should be split between a UK tracker and a global tracker. The trouble is of course that introduces extra currency risk – ultimately a sterling investor will usually want sterling assets.
That said, most of the Western markets move in broadly the same direction over the long-term, so perhaps it’s not such a big issue. It’s true I believe the UK market is very ‘international-ized’ – I forget the exact figure, but some huge proportion of earnings (possibly over 50%) of the FTSE 100 is earned outside of the UK (may be lower after the commodity slowdown). Of course there’s currency risk – mainly dollar exposure – to that, too.