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Putting Together a Portfolio Like Harvard’s Endowment

Harvard University has the largest endowment in the world, and there’s one key difference that differentiates it from how we might run our own portfolios.

Sparklers and Champagne Glasses

While perhaps an oversimplification, investors typically prioritize one of three points of focus. Fundamentals, such as price multiples, revenues and profit growth; technicals, using charts and technical analysis; and sentiment, which is subject to the whims of the market but has improved meaningfully in the last few months.

All three schools are important, but investors also need to appreciate the importance of asset allocation with a global perspective.

This is a skill deftly deployed by the Harvard Management Company, which manages the university’s $50 billion endowment.

Established in 1974, Harvard’s endowment leverages a creative and independent diversification strategy to generate impressive, market-beating returns.

While most individual investors focus on short-term stock picks and chase funds with the highest latest returns, endowments put their energies into asset allocation.

This means figuring out what percentage of their capital to put in different buckets of assets such as U.S. or international large-cap and small-cap stocks, real estate, venture capital, private equity and more.

A key difference is the variety of buckets endowments use to diversify with the goals of lowering risk and volatility and increasing returns.

The major difference is that endowments allocate more capital to what is referred to as alternative assets. These include private equity, venture capital, real assets such as timberland and precious metals, and hedge funds covering all sorts of assets from frontier markets and currencies to global macro.

For example, Harvard Management Company allocates almost 40% of its endowment portfolio in private equity and 11% in tech stocks alone. Real estate accounts for 5% of the portfolio, with bonds accounting for 6%, and cash at 5%.

For the 2023 fiscal year ending June 30, Harvard’s endowment delivered a positive return while MIT and Duke Universities suffered 2.9% and 1% investment losses, highlighting Harvard University’s brand in the investment world.

Over the past six years, the Harvard Management Company has delivered a 9.2% annualized return, affirming its edge in picking stocks that outperform the overall market.

Here is where we mortals can invest like Harvard.

Harvard benefited from some names familiar to all - stocks such as NVIDIA (NVDA), Meta (META), and Alphabet (GOOG).

But perhaps some more surprising investments are Taiwan Semiconductor (TSM), and a Dutch firm ASML Holding N.V. (ASML). Both of which are semiconductor and artificial intelligence plays in Harvard University’s investment portfolio.

Taiwan Semiconductor makes more than half of all the chips in the world with complete dominance in high-performance chips. ASML produces, markets, and sells advanced semiconductor equipment including lithography, metrology, and inspection systems for advanced chipmakers. Its biggest customers are manufacturing facilities that make wafers that get cut into high-performance chips. Right now, ASML is prohibited by a coalition of countries including America from selling their cutting-edge chip-making equipment to China.

Interestingly, the Harvard endowment has a meaningful position in a Southeast Asian stock that the Cabot Explorer has recommended, and that I own personally.

Headquartered in Singapore, Grab Holdings Limited (GRAB) is a widely known and used technology company that offers super apps that enhance merchants and consumer connections in Cambodia, Indonesia, Thailand, Malaysia, Myanmar, the Philippines, Singapore, and Vietnam.

While the stock is up only marginally so far this year, it delivered a first-ever adjusted core profit in the third quarter driven by cost reduction measures and strong demand for food delivery and ridesharing on its apps.

Two years ago, Grab Holding traded over $12 a share, now it sits at just over $3 a share. Skeptics have been in charge, but this household name in Southeast Asia has made progress and the tide may be turning.

Should you follow Harvard into Grab? See what the Cabot Explorer thinks by joining today.

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.