ebook essays pieces of the puzzle
Wednesday, April 20th, 2011
through the valley

This is a bit cluttered for a pix chart, but that’s for good reason.  Last week, in a posting on a book for the prudent fiduciary, I wrote that those who serve as trustees for long-term pools of money “don’t know what to believe or in whom to trust.”  In a chart, here’s the reason why.

To create it, I used a posting from last May by Mebane Faber on his blog, World Beta, charting components indicative of the Yale Endowment at that time, as mapped into ETFs.  They are from Faber’s “Table 2,” which re-classifies investments in private partnerships by estimating and including the exposures via publicly-available vehicles; I substituted IEF for AGG in order to display an all-Treasury component.  These are the cumulative total returns.

While the typical institutional fund would have investments in other traditional fixed income categories, the story told by this chart is the key one facing fiduciaries with a long time horizon (perpetuity is a very long horizon):  What risks should be assumed in pursuit of higher expected returns?  Along with that:  What are the returns that the market structure can be reasonably expected to deliver?

Almost all of the investments came down hard together.  We now have been through the valley.  Imagine yourself as a fiduciary, walking into a meeting to discuss the investment policy mix.  What do you believe?  (Chart:  Bloomberg terminal.)