Old Dog, New Tricks

    So, I thought I would write a little bit about how the big money-manager guys play the investment game, at both the more immediate manager level, and the more removed school endowment level.

First, the more immediate manager level.  These are the guys who work for mutual funds or other specific types of money managers.  They operate on one basic principle: knowledge = good investing.  Basically this means a particular mutual fund or other mixed organization of individual stocks has a specific, narrow investment area.  This could be one industry, or country or region, or one category of goods such as commodities or raw materials.  And these professionals know everything about that area.  They have strong contacts with a variety of professionals working at companies in that area.  They know the latest and greatest developments that are coming.  Most especially, they are watching the supply and demand chains for a variety of corporate entities related to their area.  Basically this broad spectrum of knowledge in a narrow part of the investment pie is supposed to help them make intelligent and informed decisions about what companies will do well and should be invested in by the larger portfolio.  Of course this sometimes breaks down – even the best, most informed guesses are not correct.

How this relates to you:  These are the same types of people you will be working with to manage your money, so this does give you a better sense of how they operate and why they can probably do a better job picking stocks than you can.  But how do you really tell the difference between one service provider and another?

On to the next topic: how endowments pick their money managers.  Basically, endowments have begun to follow the philosophy of judging their managers not on returns, which can be misleading, but on something less quantifiable – the way they think.   The idea here is that an intelligent and informed manager will make an advantageous investment decision 8 or 9 times out of 10.  In addition, the same philosophy of knowledge = good investing is used to pick managers.  Opinions are collected from other investment firms, previous co-workers and associates to individuals within the firms, and other investors in the firm.  Most importantly, face-to-face meetings are arranged so specific questions or issues can be addressed, and the general intelligence and knowledge of the group be evaluated.

How this relates to you: Obviously, the majority of the evaluation techniques are not open to the individual.  How then, if past performance is not always a valid indicator, can you choose one specific investment firm over another?   Key principles remain the same.  More knowledge means better investment judgment, and a certain amount can be discovered publicly.  Check out the key individuals in a firm – read articles about them.  There are tons and tons of publications about which industry or area should be invested in – check some of these out, and see how they compare to your own evaluation of current market conditions.  Absorb as much as possible in areas familiar and comfortable for you, and see where ti takes you.  Of course, investing in a range of industries is important, but if you know more about one area, that’s where your particular knowledge is going to give you an edge.  Don’t be afraid to use it by weighting your portfolio in that direction.

Oh Joy!

I am attempting to write something a little more systematic about investing and all its different types and little forms, but unfortunately my boss is making me do actual work instead of writing my blog.  And the whol ‘systematic’ thing means it requires research instead of me just making stuff up.  So it takes longer.

Anyway, avid reader, while-u-wait, here’s the little compilation/article I had to do as part of my real job.  Enjoy!

            With the recent Senate hearing on endowment spending rates for universities in the fall of 2007, most universities are taking a look at their past spending records and evaluating how a governmentally determined spending rate might affect them, and how their current spending policies affect the tuition of their students.  Institutions with large endowments such as Yale and Harvard have already declared spending increases in the wake of public awareness of the issue, though most institutions have spoken against spending regulations.


            Harvard was one of the first schools to publicly declare itself opposed to such regulation.  However, a tuition assistance plan targeted to provide increased assistance to middle and upper-middle income families announced late last year was regarded as a positive response to the base issue of affordability.  Following Yale’s announcement of an increase in their spending formula, Harvard also determined to raise spending to 5% from 4.3% last year.  This change does not imply a policy shift, and large returns for the endowment could mean that spending does not reach the 5% mark.


Yale announced in early 2008 that it would raise its spending formula to an annual 4.5-6% payout, as well as a 37% increase in spending for this year, including a substantial increase in student aid.  Concerns regarding possible government regulation of spending were not addressed.


Despite these policy and numbers shifts from those universities with the largest endowments, response to new regulations remains lukewarm at best.  Stanford raised its spending rate for the new year from 5% to 5.5% in June of 2007, while Princeton 5% to 5.75% in the fall of 2007.  Both of these increases seem to be attempts to more accurately accommodate investment gains in the overall budget rather than a policy shift.  Duke instituted an increase from below to above 5% spending last spring as a result of good endowment performance, but again this was not a policy shift.  UPenn publicly rebuked governmental controls but also announced a new loan-free financial aid program.  Similar to Harvard’s initial response, this move rejected a higher spending rate while at the same time addressing the underlying issue of affordability.  Northwestern was also opposed to regulation, despite their annual spending of 5%, due to adverse affects regulation might have in the future.