The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets
Wiley. Confirmed on mebfaber.com/books
Summary
Faber and Richardson set out to reverse-engineer the investment approach of the Yale and Harvard endowments and to build a version an individual investor could implement.
The first part describes the endowment model as David Swensen developed it at Yale: heavy allocation to equity-like assets, substantial diversification across asset classes with low correlation, large positions in illiquid alternatives including private equity, venture capital, real assets and absolute return strategies, a very long time horizon, and the argument that the illiquidity premium is available to investors who genuinely do not need liquidity. The authors reconstruct the endowments' allocations from their public reports and from thirteen-F filings.
The second part is their implementable version. They argue that an individual cannot access top-quartile private managers and that the manager selection, not the asset allocation, is where the endowments' returns actually come from. Their substitute uses liquid exchange-traded funds across five asset classes: domestic equities, foreign equities, bonds, real estate and commodities, held in equal weight.
The third part is the timing model that the book became known for. They apply a simple rule: hold an asset class when its price is above its ten-month simple moving average and hold cash otherwise, evaluated monthly. They present long backtests showing that this rule produces returns similar to buy and hold with substantially lower drawdowns, because it exits during sustained declines. Faber published the underlying research separately as a widely circulated paper.
The timing rule's backtested performance depends heavily on the period tested, and its out-of-sample record since 2009 has been weaker, with whipsaw losses in choppy markets. The endowment model itself has also underperformed simple index portfolios for many institutions since publication, and the illiquidity premium argument is now contested.
Key takeaways 7
- The endowment model allocates heavily to equity-like and illiquid assets on the argument that a genuinely long horizon earns an illiquidity premium.
- The endowments' returns came substantially from access to top-quartile private managers, which individual investors cannot replicate.
- An equal-weight allocation across domestic equities, foreign equities, bonds, real estate and commodities approximates the diversification without the access.
- Holding an asset only when its price exceeds its ten-month moving average produced similar returns with much smaller drawdowns in backtests.
- The timing rule works by avoiding sustained declines, not by predicting them, and it necessarily lags at turning points.
- Trend-following rules suffer repeated small losses in markets that oscillate around the moving average without trending.
- Backtested timing results depend heavily on the period tested, and this rule's out-of-sample record has been weaker.
Who should read it
Individual investors and small institutions who want a liquid implementation of diversified allocation with an explicit drawdown-control rule, tested against its out-of-sample record.
About Meb Faber
Co-founder and Chief Investment Officer, Cambria Investment Management; host of The Meb Faber Show
A Quantitative Approach to Tactical Asset Allocation is one of the most downloaded papers on SSRN and his short books popularised trend following and global value for retail investors.
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Where it sits in the reference 3
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