This recent article published by Daniel Gross on Slate.com titled “The Economy Minus Houston” describes the important economic role that Houston plays within the context of the broader U.S. economy. As the fourth largest city in the United States, Houston is an economic powerhouse and home to over 6 million people who work in various global industries including energy, chemicals and healthcare. Given Houston’s $503 billion contribution to GDP (in 2015), many people expect the disruption caused by Hurricane Harvey will be temporarily felt across the nation in the form of higher fuel prices and lost economic growth.
In this recent Barron’s article titled “Indexing and the Rise of a New Nifty 50”, Frederick “Shad” Rowe of Dallas-based Greenbrier Partners Capital Management discusses some of the opportunities that indexing creates for active managers. He argues that as indexing continues to rise in popularity, the valuation spread between high quality companies and mediocre companies will continue to narrow. This phenomenon should present opportunities for low cost stockpickers to make attractive investments in high quality companies for the long term.
We encourage you to reference our Viewpoints publications listed on our website should you wish to learn more about our overall investment philosophy at Houston Trust Company.
This article from the New York Times entitled “Endowment Sweepstakes: How Tiny Houghton College Beat Harvard” describes how Houghton College, a liberal arts institution in the Genesee Valley in western New York, outperformed many of the larger, more notable endowments across the country, such as Harvard and Yale. Their $46.4 million endowment emerged in the top quartile of all endowments earning 11.85 percent return for the 2016 fiscal year according to the National Association of College and University Business officers, known as Nacubo. They generated these returns by moving out of hedge funds and alternatives and into amore traditional 70/30 allocation mix of low cost Vanguard index funds and mutual funds. Houston Trust Company believes that a combination of both actively managed individual equity securities and passively managed (index) exposure is a prudent approach towards investing that works over time.
Endowment Sweepstakes: How Tiny Houghton College Beat Harvard
Charles (“Charlie”) Munger, Vice Chairman of Berkshire Hathaway and Warren Buffet’s long-time “partner” in business, delivered this speech in 1998 critiquing the investment practices of leading charitable foundations and endowments. He notes the eroding effects on investors’ returns due to the layers of fees which “can easily reach 3% of foundation net worth per annum”. These fees are not limited to investment advisory fees, but also include the effects of high turnover and transaction fees which tend to accompany complex asset allocations, commonly observed in the portfolios of many not-for-profit institutions.
Charlie’s advice to improve the investment practices of institutional investors is to reduce the cost of their investment management programs though indexing and investing in a limited number of high quality securities managed by experienced managers, and holding these securities for long periods of time. This approach resonates well with our investment philosophy at Houston Trust Company, and it is what we implement in the investment practices of our institutional, and individual clients, alike.
We have added a couple of charts which elaborate on Charlie’s point, which we have annotated in the original article.
John Maynard Keynes is perhaps most famous as a (somewhat controversial) economist. However, he was also a skilled and successful investor and portfolio manager.
This article from the most recent edition of the Financial Analysts Journal entitled “The British Origins of the US Endowment Model” describes Keynes’ management of the endowment of King’s College, Cambridge from 1921 until his death in 1946. We noted similar investment philosophies among Keynes’ management of the King College endowment and our approach at Houston Trust Company: the importance of a long-term focus, the benefits of an equity bias, and the futility of market timing. The conclusion of the desirability of broad diversification with low investment costs is also very much “in sync” with our approach at Houston Trust Company.