Through their own expertise and interviews with 12 prominent foundation or endowment fund managers, the authors describe in this well-written book (reviewed with The Standard & Poor’s Guide to the Perfect Portfolio: Five Steps to Allocate Your Assets and Ensure a Lifetime of Wealth ) the history of investing for foundations and endowments, provide an engrossing and readable overview of the basics of this type of investing, and uncover commonalities—certain shared principles—among these managers.
In 1952, Harry M. Markowitz changed the way the investment profession constructs portfolios when he published his seminal work on portfolio theory in the Journal of Finance (“Portfolio Selection,” March). Thirty-four years later, Gary Brinson, Randolph Hood, and Gilbert Beebower, in what is now a classic article in the Financial Analysts Journal (“Determinants of Portfolio Performance,” July/August 1986), added empirical evidence to the asset allocation decision by showing that 93.6 percent of the variation in total plan return could be explained by the plan’s asset allocation.
In The Standard & Poor’s Guide to the Perfect Portfolio: Five Steps to Allocate Your Assets and Ensure a Lifetime of Wealth , Michael Kaye, CFA, a portfolio officer in the Portfolio Services Group at Standard & Poor’s and a columnist for BusinessWeek online, attempts to move individual investors away from the stock-picking decision to the allocation decision. Kaye also authored The Standard & Poor’s Guide to Selecting Stocks: Finding the Winners and Weeding Out the Losers (McGraw-Hill, 2006), but in the new guide, he turns his attention to the broader questions of portfolio construction.1 Theoretically, the optimal portfolio should be the same for all investors, but in practice, institutions have access to a much richer array of investment opportunities than individuals do, so the approaches to investing of the two classes of investors can differ significantly.
Kaye takes the reader through the basic asset classes available to the individual investor and the construction of several different portfolios. Unlike Richard Ferri in All about Asset Allocation (McGraw-Hill, 2006), Kaye does not discuss the intuition underlying portfolio theory. Rather, he provides a guide to the basics of creating a sound portfolio. His target audience is clearly not sophisticated investors who would like some theory with the cumbersome math stripped away but novice investors in need of a how-to book.
The Standard & Poor’s Guide to the Perfect Portfolio consists of four parts. It begins by providing an overview of the various investment vehicles that are available. Although the book is for investors with limited backgrounds in investing, Kaye does delve into some asset classes, such as commodities and derivatives, that are best left to the seasoned investor. The second section of the book takes the reader through a miniature investment policy statement to show how one determines one’s appropriate asset allocation mix. In the third section, Kaye shows the reader how to create five basic types of investment portfolio, ranging from capital preservation to aggressive growth. The final section summarizes the key points of the book and provides investors with the motivation to get started.
The Standard & Poor’s Guide to the Perfect Portfolio is a good book for private wealth managers to recommend to clients with limited or moderate knowledge of the investment process. The topics are too basic, however, to be of interest to the readership of the Financial Analysts Journal .
A more interesting read is Foundation and Endowment Investing: Philosophies and Strategies of Top Investors and Institutions . Authors Lawrence E. Kochard, CFA, chief investment officer of Georgetown University, and Cathleen M. Rittereiser, an alternative investment marketing and business development executive specializing in foundations and endowments, try to demystify the world of foundations and endowments through their own expertise and a series of interviews with 12 prominent foundation or endowment fund managers.
Foundation and Endowment Investing is reminiscent of two other books that delve inside a financial world primarily through interviews. Inside the House of Money by Steven Drobny (John Wiley & Sons, 2006) takes the reader into the secretive world of hedge funds through interviews with a number of successful hedge fund managers. And John Train’s classic The Money Masters (Harper & Row, 1980) profiles some of history’s greatest investors, including Warren Buffett, Benjamin Graham, and Sir John Templeton.
Like the Drobny and Train books, Kochard and Rittereiser provide insights into how their profiled managers got their start and give a broad overview of the managers’ investment philosophies. This approach makes the book both engrossing and readable. It also provides insights into the different paths that can lead to a career in foundation/endowment investment management (as well as how the managers’ different paths shaped their investment philosophies). Not surprisingly, a number of the managers trace their philosophy and/or training to David Swensen, chief investment officer (CIO) of the Yale University Endowment, who pioneered much of what is now considered to be standard practice in the endowment fund management field.
Swensen’s outstanding performance with Yale’s portfolio, and the investment success of other educational institutions’ endowments, such as Harvard’s, and of some foundations has made the workings of endowments/foundations of growing interest. Kochard and Rittereiser have produced a well-written, enlightening book on the subject.
The authors begin by tracing the early roots of foundation investing, its evolution, and the basics of foundation and endowment investing. Although endowment investing has been around for centuries, early endowment investing was unstructured and often consisted of donors volunteering their time to manage a highly conservative portfolio. The modern era of not-for-profit investing began in 1969 and can be attributed to McGeorge Bundy of the Ford Foundation, who moved the foundation toward a structured and professional approach to investment management. Kochard and Rittereiser do an excellent job of tracing the history of investing for foundations and endowments, and they provide an overview of the basics of this type of investing, which can differ significantly from the management of other kinds of funds. These differences include the limited inflow of new assets to most institutional foundations and the “intergenerational equity” doctrine that guides educational endowments to manage the funds with the objective of perpetuity.
The second part of the book profiles 12 foundation or endowment managers. They come from varied backgrounds. For example, Allan Bufferd, the retired treasurer of Massachusetts Institute of Technology, began his career as an engineer and lawyer before moving into the treasurer’s office. Ellen Shuman, who graduated with a degree in art history, now serves as the vice president and CIO of the Carnegie Corporation. The managers’ personal histories are fascinating in their own right, but the authors enhance them by interweaving the individuals’ investment philosophies with their histories.
The final part of the book ties together the various investment philosophies by focusing on the commonalities. Not surprisingly, the majority of the managers share certain principles: for example, a value orientation and the belief that not-for-profit organizations must diversify their portfolios by including alternative investments, such as venture capital. Another common view is the need to move away from the old method of having an investment committee and consultant working together in choosing investment managers to having a professional investment staff actively outsourcing and evaluating investment themes and managers.
On the whole, Kochard and Rittereiser have produced a well-written book that is both informative and entertaining. Moreover, Foundation and Endowment Investing is an excellent resource for anyone who is considering a career move into this field or who has not-for-profit organizations as clients.
—R.L.M.