Thursday, September 10, 2009

University Endowments Are Back Into Commodities

I couldn't believe that the article was written yesterday, not a year ago.

George Washington Fund Adds Commodities as Inflation Protection
(9/9/09 Bloomberg)

"Sept. 9 (Bloomberg) -- George Washington University is increasing holdings of commodities such as oil and natural gas out of concern that a return to inflation rates last seen in the 1970s may ravage the value of its $1 billion endowment.

"U.S. consumer prices may rise 8 percent annually within three to five years because of unprecedented government spending and deficits, said Donald Lindsey, the Washington school’s chief investment officer. Growth in the consumer price index averaged 7.4 percent from 1970 through 1979, a period remembered for economic stagnation and eroding values of fixed-income investments, compared with 0.1 percent in 2008."

George Washington University is hardly alone. The article also cites Pepperdine University and Notre Dame University, all intending to increase their holdings of real assets (and equivalents) as a hedge against inflation that they all see coming, due to massive government spending and resultant deficit set to grow even bigger.

Last year when these university endowments crowded the commodities market with their long-only positions, that was on conviction that commodities, particularly crude oil, would continue to rise because of increasing demand from BRIC (particularly C) countries. The commodity bubble spectacularly started to collapse in July, a harbinger for the stock market collapse 2 months later. As the result, the endowments lost huge chunks of their investment. Harvard University endowment lost 30%, as of June 2009. On the west coast, Stanford University endowment probably lost as much if not more.

(By the way, PIMCO's Mohamed Al-Erian was the president and CEO of Harvard Management Company until 2008. Lucky he got out in time.)

This time, the reason has changed to a fear of 1970s-style "inflation" or "stagflation". No matter the reason, what counts is their investment behavior/style which may not have changed: long-only, and buy and hold. And they weren't quite nimble traders last year when the collapse started in July; they had to hold a meeting first and decide what to do, and.... it was too late.

Let's see if there's a repeat, or if they get lucky this time and they get what they want - inflation.


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