Posted by Davy Bui on August 24th, 2009 in Investment Strategies
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I recently finished reading the latest edition of David Swenen’s Pioneering Portfolio Management, a book that deals primarily with asset allocation from an institutional/endowment perspective. A review is coming soon but today’s Wall Street Journal carries a related article:

Harvard Endowment Regroups [$]

In the face of a 30% loss last year, new investment boss, Jane Mendillo, is making some changes at the endowment. Some changes deal more with logistics, such as increasing internal management, negotiating active management fees and moving toward managed accounts.

The line that caught my eye was Harvard’s intention to reduce their private equity allocation, which comprised 13% of the portfolio last year. According to the Swensen institutional playbook, such a change would be a major alteration of investment policy.

While it is impossible to glean the reasons for such a move from the brief article, the move reeks of reactionism. In his book, Swensen asserts investment success requires a long-term outlook and an acceptance of certain “pseudo-risks” like volatility and illiquidity, which are more inconveniences than risks if the portfolio is properly managed.

Again, this is all conjecture from outside the fishbowl but I’d really liketo hear the reasoning behind reducing the private equity allocation. Hopefully, it is more substantive than “we had a big loss last year.” As long as Harvard continues to enjoy access to the top funds and managers in the space, it makes little sense to change allocations near the bottom of the market — the epitome of buy high, sell low.