Market Trounces Harvard

So how hard is it to beat the market? From 1993 to 2008, the portfolio managers of Harvard’s endowment fund beat the S&P 500 by almost five percent per year. A major contributor to that performance was a hugely successful investment in timber. Since then, things have not been so rosy (or even Crimson). Using the analysis in the article, the Harvard endowment fund has underperformed a blended portfolio of stocks and bonds by one percent per year over the past 20 years. Based on the current endowment value of $42 billion, this means the endowment potentially lost out on $420 million in growth per year, or roughly $8.4 billion dollars of growth over this period. It is tough for the best and brightest to beat the market.

Austria's 100-Year Bonds

 In 2017, Austria issued 100-year bonds with a paltry yield of 2.112 percent. But recently, the country issued more 100-year bonds with the unbelievably low yield of .88 percent! And the issue was four times oversubscribed, meaning investors were willing to buy four times the amount of bonds than were being offered. Given the ultra-low interest rate environment, investors appear to be taking risks too attain any positive yield. For example, half of the German government debt has a negative yield, and the yields on Austrian government debt with less than 20 years to maturity are negative as well.

Thiel In Control

 Palantir Industries, the data-mining company owned by billionaire Peter Thiel, went public this week. But take note, if you buy stock in the company you will have virtually no say in the company's operations. Thanks to super-voting shares, Thiel and two other co-founders will retain voting control in perpetuity. Other Silicon Valley companies like Alphabet, Facebook, and Snap have similar voting structures. As Ohio State professor Michael Weisbach notes, "They  set it up so Peter Thiel can still sort of run it like a private company and still have the advantage of being public." The three co-founders will retain 49.99 percent of the voting power in the company regardless of the number of shares owned.    

Harley-Davidson Abondons India

Harley-Davidson announced that it was discontinuing manufacturing and sales in India, effectively abandoning the world's largest motorcycle market. Harley-Davidson joins the list of foreign manufacturers that have not been able to enter the Indian market, including General Motors, which stopped sales in India in 2017, and Ford, which entered a joint venture to scale back its Indian operations. These companies all exercised the option to abandon.

Dividend Comeback

 Dividends took a major hit during the early part of the COVID lockdown, with numerous companies cutting or eliminating dividends. Now it appears that dividends are making a comeback. In August, 13 S&P 500 companies announced dividend increases, but only two companies announced a dividend cut. Remember, a company will generally only increase dividends if it believes that it can maintain that dividend in the future. Overall, this appears to be an indication that these companies believe the worst of the economic crisis may be over.

Loyalty Backed Bonds

Delta announced that it would issue $6.5 billion worth of new bonds. What is particularly interesting is that the bonds will be backed by the company's SkyMiles loyalty program. Although Delta did not disclose the value of SkyMiles in the announcement, United Airlines issued debt in June backed by that company's MileagePlus program, which it valued at $20 billion.

NPR Goes Junk

 A recent podcast from Planet Money on NPR details the purchase of a junk bond issued by Hornbeck Offshore. Hopefully, the initial purchase was designed for the podcast, not as an investment. For example, the bond was purchased because it had the lowest price, which means the bond had the highest yield to maturity because it was likely the closest to bankruptcy. If you listen to the podcast, you will find out that the company did eventually go through a bankruptcy reorganization. One of the most perceptive comments made after the bond was initially purchased was that it would not likely make it to maturity. The podcast is worth a listen since it is an interesting journey of the purchase of a junk bond through the bankruptcy process.