Harvard's Lesson: Set a Defensive Strategy

05/19/2017 2:50 am EST


Dennis Slothower

Chairman and CIO, Alpine Capital Management

Harvard Endowment, which manages $36 billion in assets, is selling $2.5 billion in private equity, venture capital, and real estate investments, observes Dennis Slothower, editor of Wall Street's Underground Profits.

These are not easy things to sell should a recession hit, so reducing illiquid assets is a defensive maneuver, as we’ve been seeing many financial institutions do recently.

What a history Harvard has with this Endowment. Under the management of Jack Meyer, the Harvard Endowment grew from $4.7 billion in 1990 to $25.9 billion in the fall of 2005, when Meyer left. At that time the Harvard Endowment was the largest endowment in the world.

One of the successes of Meyer as a manager was how he managed the Endowment during bear markets. For example, the S&P 500 fell -10.14% in 2000, -13.04% in 2001, and -23.37% in 2002 in the dotcom recession.

The Harvard Endowment was up +32.2% in 2000, -2.7% in 2001, and only lost -0.5% in 2002 compared to the -23.37% in 2002.

In 1994, the S&P 500 suffered a minor recession and was down -1.54%, but Meyer’s endowment was up +9.8% in this lackluster year. In the recession of 1990, the S&P 500 fell -6.56% but the Harvard Endowment was up +7.5%.

What was behind Meyer's success? Jack Meyer used active money management rather than passive money management.

To protect his portfolio, Meyer used diversification but more importantly, he used a simple buy rule: Buy when the S&P 500 monthly was above its 10-month smoothed moving average. Sell and move entirely to cash when the S&P 500 monthly price fell below its 10-month moving average.

In July 2001, economist Lawrence Summers, became the 27th president of Harvard and pushed to have the endowment's cash all invested, including the general operating account.

Despite warnings from Meyer, Harvard Management Chief for 15 years, Summers felt the cash risk was worth taking. Meyer left Harvard after clashing with Summers.

In a vote of no-confidence by Harvard’s faculty, Summers then resigned. Then the stock market crashed in 2008 and Harvard lost 27% of its $37 billion endowment in 2008!

The moral of this story is not Harvard, Jack Meyer, or Larry Summers. The moral of this story is that under Jack Meyer Harvard’s endowment had a risk management strategy to defend against the damages of bear markets, but when Meyer left Harvard, the endowment no longer had a strategy to defend itself against bear markets.

Whether it is the 10-month SMA or the death cross of the 50-day crossing through the 200-day moving averages, investors need to decide ahead of the next recession how they want to approach investing.

An investor can raise cash by selling the most vulnerable components of one’s portfolio, selling those corporations most vulnerable in a recession, or allocating to the best value and most liquid stock, but these are all defensive maneuvers.

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