From a professional perspective, the most important aspect of the 2009 Investment Report (pdf) is the move to reduce long-only equity exposure. This decision matters more to the wealth of Williams over the next 50 years than anything else that the college has done in the last decade. Will the Record be smart enough to cover it? Probably not. And that is why you have EphBlog! Consider the key asset allocation table:


The College is making some fairly radical changes. Is anyone on the faculty paying attention? Or do they just assume that financial industry hot-shots always know what is best? Just asking!

The less important change here is the move from looking at equities on a domestic-versus-international basis to grouping all public equities into a single Global Equity class. See this report from MSCI/Barra (pdf) for an overview of the issues involved. I agree with this switch.

The much more important change is the dramatic decrease in long-only equity exposure. This is huge. Recall our previous discussion of the College’s asset allocation. Here are the numbers for June 30, 2006 and June 30, 2007. (Collette Chilton began work in the fall of 2006.)


Click on the images for better views. Can you spot the inconsistency? Details and discussion below.

1) What the heck is going on? Williams had 25% in US equities in June 2006 and 27% in June 2007. Completely reasonable. Then how could it possibly have had 46% in December 2006? There is no way that an endowment the size of Williams could have (or would have) bought so much in US stocks in the fall of 2006, much less sold it all again in the spring on 2007.

I highly doubt that there is anything nefarious going on here, but I can’t come up with a good explanation. Perhaps some of the funds that the College classified as “Special Strategies” in 2006 are now, after the fact, classified as US equity. (But could it really be 21% out of the 25% total in that category?) Perhaps some of the 10% that is listed as “Absolute Return” in 2007 is included in US Equity in this new breakdown. (That might make sense now that long/short is included here.) The whole thing is a mystery.

2) Keep in mind that there is a big difference between the new categories “Global Long/Short Equity” and “Global Equity.” In general, a Global Equity fund is just like your typical US mutual fund. It will only hold stocks long (no shorting) and will be measured relative to a long-only benchmark. If the long-only benchmark — Williams will probably use something like MSCI ACWI (All Country World Index) — does well, then you will do well. This is true, by definition, if you index. (But, as far as I know, Williams uses active managers.) If you don’t index, then your manager will do somewhere between a little better and a little worse than the index. Either way, the major driver is what happens to global equities in general. For years (decades?), Williams has had around 50% of the endowment in long-only equities.

Global Long/Short Equity is very different. Long/short investing means that you buy some stocks long and sell others short. (Market-neutral, generally recognized as a subset of long-short, means that you have equal dollar amounts long and short.) Needless to say, it would nice to get more detail, but my summary would be that the College is now much less exposed to overall movements in the market. A market-neutral global equity fund might very well earn a return of 0% even if global equity markets were down 50% because the fund is not “exposed” to overall market movements since, for every stock it is long, there is another stock that it is short. In the same way, such a fund might also be flat even if global markets were up 50%, as they have been in the last 6 months.

And that is the great dilemma in deciding whether or not you want to invest long-only or long-short. If you think markets are, on average, going to be much higher in the next ten years, then you want long-only exposure. (I am ignoring my sophisticated strategies like equitizing to maintain the same long exposure.) If you think that markets will be flat or go down, then long-short (or market-neutral) is better. It is very hard to know what the right answer is. My point is that the College is doing something radically different than what it was doing just a few years ago.

3) It could be that this change is not as big as I think because some of the money invested in equities in past years may have been long-short. I am fairly certain that this is not so, at least judging from the language in past reports. But I could be wrong. More disclosure, please. Other evidence is this description of the College’s reasoning:

Equities –While traditional equities provide the potential for long-term portfolio growth, we are continuing to de-emphasize traditional equities in favor of asset classes that may provide more attractive risk/return characteristics and protect the portfolio when equities struggle.

So, it looks like this is a real change. The College (pdf) had 50% in long-only equities in 1991 and 51% in 1996. Moving to 26% in 2010 is a significant difference.

Summary: It is tough to have a fully informed opinion on these changes without more data. But there is no doubt that something major has happened. Are these changes a good idea? Probably. I almost certainly would have voted for them had I been on the Investment Committee. Yet I sure do wish that Williams were more transparent in its actions and more inclusive in its decision-making.

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