Harvard Management Co. has 120 securities in its publicly
disclosed portfolio. Its top four holdings, representing 55% of the
portfolio's $2.3 billion value, are internationally oriented
exchange-traded funds (ETFs) that focus on generating income in
emerging markets, China, Brazil and South Korea, respectively.
Given Harvard's clear preference for managing its risk through the
diversity afforded by ETFs, I wanted to know which stocks the
nation's wealthiest university endowment was holding.
Seven equities comprise at least 1% of the portfolio as of its most
recent filing. None are in the same industry, all except one has a
multibillion-dollar market cap; most are megacaps valued at more
than $40 billion. Three of the companies -- BJ Services, Burlington
Northern Santa Fe and Marvel Entertainment -- have since been
Here are the companies Harvard owns, what the university is betting
on, and my take on the investment's prospects:
The largest stock holding is
Barclays PLC (
. This British bank has seen decent returns since Jan. 1, with a
better than +27% gain, and a one-year return of more than +100%.
Even so, the bank has lost nearly 50% of its value during the past
five years as the global financial system weathered the Great
Recession. Investors are still unwilling to pay much for bank
assets, which isn't so surprising when you look at the strength of
the asset pool that required 8.0 billion pounds in loss provisions
in 2009 and 5.4 billion pounds the year before. Investors are only
willing to pay 88 pence on the pound for assets, which effectively
values the bank's underlying business at zero.
As Barclays and other banks earn their way out of the bad loans
they made, their earnings will inevitably rise, as the cash they
were allocating to problem loans will flow instead to the bottom
line . It's a waiting game. Harvard should keep at it. I'd hold
Teva Pharmaceutical Industries (Nasdaq: TEVA)
is an Israeli drug maker that specializes in generics. Sales,
earnings and book value have grown every year since 2000. The
shares currently command 27 times earnings, a discount to its
historical average of about 40. Future profits should be
significantly enhanced by a recent acquisition of a German drug
maker and by a spate of expiring U.S. patents.
Owning Teva is a bet on cost-conscious consumers in the health-care
sector, an economic segment that tends to grow faster than overall
U.S. gross domestic product. As recent health-care legislation
extends coverage to previously uninsured patients, drugs sales are
likely to see an increase. The wager has been a good one so far.
Teva has outpaced the S&P this year (Teva +11.4%, the S&P
+7.0%) and the company has posted annualized returns of +14.3% for
the past five years.
Harvard would do well to increase this position.
BJ Services (
is an oilfield services company, and owning it signifies a belief
that drilling activity around the world will remain strong. As oil
prices creep closer to the triple digits and each day seems to
bring another announcement of a new crude discovery, that appears
to be a good bet. The company was recently acquired by
Baker Hughes (
, which trades near its 52-week high at a robust 35 times earnings,
a richer valuation than
Google Inc. (Nasdaq: GOOG)
Baker Hughes is a storied company, and Wall Street likes the story.
That's why its valuation has risen to historic highs even despite
lackluster 2009 results and ho-hum forecasts for 2010. The
longer-term prospects look good, but the company offers a
less-than-compelling entry point at these prices.
I see more potential value in offshore players like
Noble Energy (
Diamond Offshore (
, especially as the Obama administration has opened up previously
protected U.S. waters for exploration.
Harvard should have some individual-equity exposure to the
petroleum sector, but Baker Hughes has limited upside. The offshore
drillers are far more promising opportunities: Why buy a company at
an inflated price hoping its earnings will rise to lower its
earnings multiple when you can buy a company with similar growth
prospects but a depressed valuation?
Harvard should close this position.
News Corp. (Nasdaq: NWS)
Rupert Murdoch's media empire has about $30 billion a year in
annual revenue, but its run of robust profits came to an end in
2009 when it posted a $5.6 billion loss. Yet even those earlier
profits haven't done much for the stock, which has achieved an
annualized gain of +0.7% in the past five years and an appalling
-10.7% annualized loss during the past three years.
Though News Corp. produces news and entertainment, it is primarily
in the high cyclical advertising business. Its recent track record
has been rocky, with 2009 earnings coming in below 2008, and its
future doesn't look great, with 2010 earnings forecast to come in
under 2009. So the fact that News Corp. is trading at 24 times
trailing twelve-month earnings per share of $0.75 is curious.
That's higher than the S&P 500, which, as a whole, should be
able to grow faster than a $40 billion media company. Its valuation
also exceeds the company's five-year average of 18.
Here's the rub: If a company's earnings are worth more than the
broader market, its assets ought to be, too. After all, the premium
to book value represents the market's valuation of the business
that's going to create those future earnings. But that's not the
case. News Corp. trades at 1.9 times its net asset value , a
discount to the broader market's 2.2. So News Corp. either needs to
somehow erode shareholder equity to lower its book value
(unlikely), or it needs to seriously juice its earnings. An
increase in earnings, however, is already priced in.
There's no upside to News Corp. Harvard should close this position.
Pebblebrook Hotel Trust (
is an anomaly in Harvard's portfolio. It's a small real estate
investment trust as opposed to a large international corporation.
It went public in December 2009 and has so far only managed to post
a small loss. The REIT received proceeds of nearly $400 million
that it plans to "opportunistically" invest in the beaten-down
hotel sector, which suffered a -16.7% decline in revenue per
available room in 2009, one of the worst years for the industry.
Any wager on hotels is clearly a bet on a strong economic recovery
where businesses aren't afraid to spend money on travel and
consumers become less discount-focused when booking rooms for
vacations. This is an income play that has, of yet, produced no
income. Better, more established yields are available.
The last two stocks that made the list are Marvel Entertainment,
which was acquired by
, and Burlington Northern Santa Fe, the railroad, which Warren
Berkshire Hathaway (NYSE: BRK-B)
bought. After approval by BNI shareholders -- with 70% voting in
favor of the $26.4 billion deal -- Berkshire said 40% of Burlington
shareholders wanted to be paid in cash and 43% wanted Berkshire
Which leaves one final question on this exam.
Will the smartest university join forces with the world's smartest
To be sure, Harvard got it wrong the first time. The university
turned Buffett down when he applied to its graduate business school
in 1950. And if Harvard wants to see serious returns on its assets,
then it might want to rethink its approach. After all, its
investment managers achieved a stunning -27.3% loss on their
portfolio in the fiscal year ended June 30, 2009, while Mr.
Buffett, who, despite his Columbia MBA, ended 2009 with a +19.8%
gain in Berkshire's book value.
The long-term picture is even better with Buffett: He has delivered
a +20.3% annualized return vs. Harvard's +11.7% annualized growth,
which roughly matches the market.
Here's the crib sheet for the exam: You have to generate some
returns in excess of market gain if you're ever going to get ahead.
Let's check the numbers: Invest $100 million with Buffett and
you'll end up with $4 billion after 20 years. Invest with Harvard
and you'll arrive at a $914 million balance during the same time
period, less than 25% of what Buffett earned.
Let's hope Harvard got it right this time and took the shares
instead of cash. We'll find out in about a month, when the next
filing is due. The cash would have earned nothing, but Berkshire
has returned +22.1% year-to-date.
Editor: Government-Driven Investing
Disclosure: Andy Obermueller does not own shares of any security
mentioned in this article.