Gross on Endowment Style Investing

Buried in Gross' secular analysis was an important observation I felt echoed what Harvard's $30 billion endowment manager Mohamed El-Erian mentioned in an interview last week with Fortune magazine:

"In effect, and we put this in the secular outlook, most investors these days are trying to be like Yale and Harvard now, which is fine I suppose, although it brings with it risks of its own in terms of leverage and ultimately compressing risk spreads to levels that are unattractive.

But the race is on to be like Yale and Harvard now. And that to us suggests that purchases of safe, low-yielding assets—U.S. Treasuries, German bunds and other bonds—are likely to decline and flows into commodities and companies and equity-like types of investments will likely increase. We’re not talking about a major overnight shift but at the margin."

In a single week two of the most respected voices in asset management pointed out the same trend; more and more investors are seeking to mimic the high return, low volatility returns of the Harvard and Yale endowments. (Come to think of it these two guys were both bond managers at PIMCO before El-Erian made the jump to Harvard Management Company, so it makes sense they share similar viewpoints.) These Harvard and Yale imitators aren't just other endowments, but also include foreign central banks (like China) with trillions of dollars of investable assets, large family offices with hundreds of millions of investable assets and even retail investors. For many David Swensen's books on endowment style investing have become bedside reading and the Yale and Harvard annual endowment reports are pored over for hints of future moves. As Gross points out this isn't necessarily a bad thing, but as more and more of these investors seek to diversify into commodities, absolute return vehicles, commercial real estate and other assets classes flows into U.S. treasuries will decrease putting downward pressure on treasury prices.