2 - Among many other worthwhile sessions, I participated in a half-day pre-conference workshop entitled "Has Diversification Failed Us?", given by Dr. Christopher Geczy of The Wharton Business School. For a brief report on this interesting and enlightening session:
Has Diversification Failed Us?
A summary of a pre-conference workshop at FPA Experience 2011 in San Diego, CA on September 15, 2011
As mentioned above, I was privileged to spend Thursday morning in a very interesting session with Dr. Chris Geczy of The University of Pennsylvania's Wharton School of Business. His office is next door to the famed economist Jeremy Siegel, author of Stocks for the Long Run.
Chris is no slouch himself: he serves as Academic Director of the Wharton Wealth Management Initiative and co-created the first full course on hedge funds at Wharton. Before earning his Ph.D. at The University of Chicago (which is, along with Wharton, one of the top two or three business schools in the nation), he worked for the Board of Governors of the Federal Reserve System in its Division of Research and Statistics. He also works with his own private investment clients. I think it's safe to say that this guy is no dummy.
The provocative title of Chris' session was "Has Diversification Failed Us?" We explored the historical value of diversification; the fact that most asset classes declined during the recession of 2008; which asset classes provide the most (and least) diversification benefits; and potential sources of diversification as we move forward in the 21st Century.
The short, emphatic answer to the question posed in the title is no, diversification has not failed us. In fact, it is more important than ever. But in a crisis, the effect of diversification is diminished. In 2008 there was no refuge from falling asset prices except for cash. So the question becomes: Where can we look for added sources of diversification? Where do we seek protection during tough times?
Dr. Geczy's session focused largely on what is known as the "Endowment Model," also known as "Yale Model" after that university's famed portfolio. In case you are unfamiliar with Yale's endowment fund (reported by the
National Association of College and University Business Officers
to be worth more than $16 billion), for many years it has enjoyed enviable returns with relatively low volatility.
Like our Millard & Company portfolio models, Yale's endowment maintains a relatively low allocation to stocks. And, like our models, Yale devotes a healthy allocation to alternative asset classes. But unlike us, the folks at Yale have access to some very illiquid asset classes such as timberland.
Fortunately for people like us and our clients, there are more and more ways to access these previously-inaccessible asset classes through ETFs and some open-end mutual funds. Of course, as more and more of these vehicles become available, it becomes vital for investment fiduciaries like us to try to identify those options that are appropriate, beneficial, liquid, stable and inexpensive. Just because we can do something doesn't mean that we should do it.
In the end, Dr. Geczy did not grace us with a simple and easy recipe for attaining the perfectly diversified portfolio. He didn't even tell us which vehicles to invest in to achieve that ideal portfolio. As always, such decisions must be dealt with on our own. But after the session, I was able to spend a few minutes alone with Chris and describe for him what we have been doing with our models. He seemed very impressed to learn that we have been allocating a portion of client assets to commodities since way back in 1998, and he indicated that our current changes were right on track. It was very reassuring.
3 - In case you're wondering, none of the great minds that I heard from in San Diego -- none -- were foolish enough to try to predict where the stock market is headed in the next few months or years. One presenter made a great point when he said, "I don't want to be one of those guys who says, 'I don't know where the market is going, but....' Nobody knows the future, and I'm not going pretend I can. I just want to get my clients ready for anything." Sound familiar?
Speaking of the she stock market, it had a good uptick last week, but that doesn't mean we can expect more of the same indefinitely. I'm reminded of a memorable Han Solo line from Star Wars: "Great shot, kid! Don't get cocky."
Have a fabulous week!
-Andy
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