Harvard Management

Mohamed El-Erian spoke at the Harvard Club of New York yesterday.

Why do Endowments outperform?
1) Simplicity of Mission
Enhance and preserve the purchasing power of the endowment
Endowment pays for 30% of the running costs of the university.
Pays 15% of the financial aid - but the absolute dollar amount has doubled over last five years.
2) Permanent Capital
Long investment horizon
AAA rating.
3) Right asset allocation versus the right amount of return and risk.
Right Vehicles
Right risk management

What is Changing
1) Vehicles are changing
What are the borders among geographies and instruments?
Derivative products have reduced barrier to entry (exotic mortgages make home buying easy)
ETF's have made international investing cheap
2) Risk factors are evolving
What are the new risk factors
Sovereign risk has decreased - how to measure emerging market risk?
As sovereign risk has decreased bottom up opportunities are available in many markets.
3) Asset allocations are changing

The Environment is Different
1) Huge imbalances
Trade and capital flows
2) Realignment of the global economy
Huge wealth transfer
Commodity prices and cheap labor have moved wealth to the poor but
"the irony of our times is that the poor countries are using surpluses to fund rich countries"

The hybrid model of management
Internal versus external.
Internal
AAA rating
permanent capital
Capacity of managers
External
Expertise
Cannot play catch up
Cannot pay thru distribution of equity
Nor can the enterprise value of the organization be realized.