Mr. Leibowitz: I have the vantage point of sitting on a number of endowment and foundation investment committees. A couple things are quite notable. Every single one of them, to varying degrees, have achieved extraordinary returns over the past three, five and, in some cases, even 10 years. I should quickly say this is not anything that I could claim credit to doing much more than just observing.
Theyve all had a combination of interesting asset allocations, which I wont touch on, and very, very good chief investment officers (and) staffs who have been able to go into some of these alternative investments in a thinking way. That's key, because to just try to throw darts at alternative investments broadly is a prescription I think David Swenson, in his book, wrote about this, the wide returns you can get for being on the left-hand side of whatever distribution exists there.
There are several (common) characteristics, but, first of all, they have very low U.S. equity allocations. They have very low traditional-type U.S. fixed-income allocations. Their investments in other forms of international emerging market equities, private equities
commodities of various sorts, real assets in real estate or, in some cases, timber, have been great productive investments over the past period of time.
A couple of things are worth noting here. First of all, these are not huge pools of assets. One of them obviously is $40 billion, and your $12 (billion), whatever it is.
Mr. Goetzmann: 20.
Mr. Leibowitz: OK, going well. Good year.
In the scheme of things, these are not comparable to the sovereign wealth funds. Theyre not comparable to the big DC plans. Theyre not comparable to the big DB plans, the governmental plans. Theyre small potatoes, which is a great advantage in the sense that the monies they can deploy
takes a lot of work and a lot of effort.
If institutional investors as a group were to pour into some of these asset classes in a willy-nilly way, it would create some dislocations. (That) would create opportunities, but would also create basically the analog of bubbles, would create shrinkage of risk premiums and would not be a positive experience for large investors to try to follow the so-called endowment models.
Another thing thats worth noting is that the endowment or foundation model tends to have what you might consider a single client. You could quickly amend that the single client sometimes has multiple points or very strongly articulated views. But its still one basic entity that theyre trying to serve, as opposed to many of the institutional investors or managed funds, which have many different agendas in some ways and many different stakeholders who can push them in various ways, especially with regard to short- vs. long-term horizons.
Again, I would just say that the movement toward the endowment model is not for the world at large, even though I think thats been a kind of a fashionable thing to talk (about).
Having said that, it doesn't follow that, A, sticking with the standard 60/40 type model for pension funds makes sense in this environment, or, B, sticking with any model rigidly, any strategic policy portfolio without more flexibility, makes sense either. Those are going to be great subjects of discussion going forward because its not a question of strategic rigidity vs. tactical chaos. Its a question of finding the balance between the two.
Mr. Grantham: Before I get to that, which is a great topic, because I spoke first, I missed an opportunity to respond. Emerging came up quite a bit and our last quarterly letter had something called The Emerging Emerging Bubble. We have a wonderful fascination for top-line GDP growth and for that matter top-line sales growth in corporations.
Clearly, emerging (markets equity) has it. Clearly, the developed world, including the U.S. now, is suffering from what I call an irretrievable case of middle-age spread. Were last years story. If you want to be conservative, buy a few dopey blue chips, utility companies and some U.S. and European stocks. If you want to make money, buy the top-line growth in emerging. Its a great bubble story.
Ive never called a bubble. I look at the last two bubbles. Nasdaq sold at three times the p/e of the rest of the world and Japan in 89 three times the p/e of the rest of the world and they were crummy bubble stories. This is a great bubble story. So how much of a p/e premium are you going to give me? Surely its going to sell at a 50% p/e premium sooner or later. If the credit crisis gets in the way, they may get whacked first, but theyll probably get there in five years, and if we stumble through, they may get there quicker.
Now, to get to this delicious issue. No one is really talking about what the clients are doing to take advantage of market dislocation. Theyre not doing much. What they are doing and what were all talking about is, in a sense, much more long term and much more powerful. Its what Ive called, Lets All Look Like Yale. I have a couple of pieces, which are totally free at GMO.com. The Lets All Look Like Yale is a huge factor. Marty was talking about it.