By Mike Caggeso
Like most investors, Harvard University's billion-dollar endowment fund took a beating during the global financial crisis. Many investors cashed out, opting for the safety of the sidelines.
But Harvard called a new play.
During the first quarter, Harvard engineered a dramatic shift in its endowment-fund investment strategy – boosting its stakes in some of the most prominent emerging market exchange traded funds (ETFs). Indeed, its largest first-quarter investments included:
- $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
- $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
- $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
- $877,700 into Van Eck's Market Vector Russia ETF Trust (NYSE: RSX)
- $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
- $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)
Harvard's fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel's Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).
Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States' Standard & Poor's 500 Index.
Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.
During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%.
And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.
Emerging Market Professors
One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.
"If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest," Doll told Bloomberg News. "After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world."
Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.
"Emerging markets, if they are going to do better than that, are going to do closer to 20%," Doll said. "There are some that already have. Some have done better than that."
A couple weeks before Doll's vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.
"We are at the base-building period for the next bull market," Mobius told Bloomberg while attending a conference in Indonesia. "What I see happening is perhaps this continuing till the end of the year, and then a breakout."
Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said.
In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.
Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard's portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.
Those four markets – Brazil, Russia, India and China – comprise the so-called "BRIC" economies of the world.
Emerging Market ETF Plays
How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.
Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn't get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets.
And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund's top-10 holdings, four are China-based, three Brazil and two India.
More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.
The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.
For more general plays on specific countries, Harvard's list of new investments could be a good starting point.
Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular "Buy, Sell or Hold" column last October. It's also one of the five emerging market ETFs that Money Morning's Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS).
News and Related Story Links:
Buy, Sell or Hold: iShares MSCI Brazil Index
The Five Most Promising Emerging Markets ETFs for 2009.
Money Morning Special Investment Report (Part II of II):
Special Report: Hit the BRICs for a Global-Investing Double Play.
Money Morning Special Investment Report (Part I of II):
Special Report: Hit the BRICs for a Global-Investing Double Play.
As Problems in India and Russia Escalate, Let's Drop the BRIC.