Invest Like Harvard and Yale

If you've followed the financial press for a while, you've surely heard of the great successes that the managers of the Harvard and Yale endowment funds have achieved. Respectively, they hold $35 billion and $23 billion -- together, that's more than the combined nominal gross domestic products of Uruguay, Cambodia, Armenia, Madagascar, Iceland, and Bhutan. The Yale fund grew by 28% in the recently ended fiscal year and has averaged about 18% over the past decade, while Harvard's fund earned 23% in the past year and has averaged about 15% over the past decade. I don't think I have to tell you that these are stellar results.

So how have the managers done it? Well, Smart Money magazine recently offered a breakdown of the target allocations of each endowment. Upon glancing at them, I was struck by one thing: Each devotes a lot of attention to areas outside the United States. Yale aims to hold 15% of its assets in foreign equity, which is the third highest category, after 27% for real assets (such as real estate, timberland, and oil and gas) and 17% for private equity. Harvard tops that international figure, by aiming for 19% in foreign equity, which is second only to real assets, at 31%.

An international boom
A glance at the performance of various foreign investment indexes gives us a hint as to how Harvard and Yale have been able to rack up such great gains. Many foreign economies have been booming in recent years. For example:

  • The Vanguard Emerging Markets Stock Index (VEIEX) fund is up 39% so far this year and has averaged more than 36% annually over the past five years. Its top 10 holdings hail from the U.K., Hong Kong, Mexico, South Korea, Brazil, Russia, and Taiwan.
  • The Vanguard European Stock Index (VEURX) fund is up some 14% this year so far and about 22% annually, on average, over the past five years.
  • Compare the numbers above to the S&P 500, up about 6% this year and a respectable 11.5% annually over the past five years.

What to do
So given this wake-up call that you might want to add some more foreign investments to your mix, how should you proceed? Well, you have lots of options. Here are a few.

  • You could just stick with American companies but add some big ones that do a lot of business abroad, so you can still get a lot of international exposure in your portfolio. McDonald's (NYSE: MCD  ) and ExxonMobil (NYSE: XOM  ) , for example, each take in roughly two-thirds of their revenues from outside the States. As foreign nations grow (especially developing ones, such as China), so will the bottom lines of these companies.
  • You could seek out strong performers among international companies and invest in their stocks. This approach is a bit tricky, though, since you'll want to do a lot of research into each company's country. Many countries are riskier, politically and economically, than ours. And accounting standards vary internationally, too.
  • You could invest in one or more international index funds. The Smart Money article suggested the iShares MSCI EAFE (NYSE: EFA  ) exchange-traded fund. It represents the European, Australasian, and Far Eastern markets, and its top holdings recently included BP (NYSE: BP  ) , HSBC (NYSE: HBC  ) , Vodafone (NYSE: VOD  ) , and Nokia (NYSE: NOK  ) . It has gained roughly 14% so far this year and has averaged nearly 22% over the past five years.

So go ahead and be a smarty-pants, like those folks at Harvard and Yale. Look beyond our national borders for some handsome profits.

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