Mebane T. Faber

Can a small-time, independent, retail trader, such as yours truly, invest like the renowned Harvard and Yale endowments? The answer, according to Faber and Richardson, is a resounding "Yes." Can I really avoid Bear Markets? Again, the answer, still echoing from the previous question, is "Yes." Momentum works.

Rather than simply read the book and write a review, I decided to back-test the Ivy Portfolio and report my findings. I was so pleased with the results of my back-tests, that I adopted the strategy for use with my own savings funds.

What is momentum investing? "Buy high, sell higher." Momentum investing flies in the face of the old Wall Street adage, "Buy low, sell high." Momentum trading works because inefficiencies persist in the market and can be exploited.

What does the Ivy Portfolio consist of? At a minimum, the Ivy Portfolio invests in five asset classes: domestic stocks, foreign stocks, bonds, real estate, and commodities. It is possible to create the Ivy Portfolio with Exchange Traded Funds (ETFs), using but one ETF per asset class: Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU), Vanguard Total Bond Market ETF (BND), Vanguard REIT Index ETF (VNQ), and PowerShares DB Commodity Index Tracking (DBC).

Incidentally, in addition to the five asset classes mentioned above, the big endowments invest in two relatively illiquid asset classes that small-time traders like me cannot touch: private equity (venture capital and buyouts) and hedge funds. Not to worry. Small-time traders like me have access to great performing funds that big endowments can't touch. I'm reminded of Warren Buffett's lament, something to the effect, that he could make more money percentage-wise with $100,000 than he could with $1 million or $1 billion.

Ivy Portfolio, the book, is the outgrowth of a paper ("A Quantitative Approach to Tactical Asset Allocation") published by Faber in 2007 in The Journal of Wealth Management. The book, like the paper, promotes Faber's favorite momentum strategy, namely, trend following. A second momentum strategy -- risk adjusted relative strength -- is briefly introduced but not developed in the book. This is my favorite momentum strategy. It is given expanded treatment in a subsequent research paper entitled "Relative Strength Strategies for Investing" (April 2010) by Mebane T. Faber.

How well does the Ivy Portfolio match the performance of the big endowments? This question is complicated by the fact that Faber's book was published in 2009 with historical data extending only through 2008. On the other hand, the historical databases for VTI, VEU, BND, VNQ, and DBC go back just through 2007. Therefore, I can merely compare the performance of the Harvard and Yale endowments with the Ivy Portfolio for the years 2007 and 2008. To our benefit, 2007 was a Bull Market year while 2008 was a Bear Market year. The 2007 annual returns for Harvard, Yale, and Ivy were 23.0%, 28.0%, and 29.5% respectively. The 2008 annual returns were 8.6%, 4.5%, and 36.3%. The Ivy Portfolio was the winner in both years, outstandingly so in the 2008 Bear Market year. Ivy also boasted higher Sharpe ratios and lower drawdowns than the big endowments, making for an outstanding risk to reward ratio. Note: I did the Ivy Portfolio back-tests with the relative strength, risk adjusted, momentum based application made available by ETF Replay. I rotated 100% of my funds into the top-1 asset class at the end of each month. Besides outperforming the big endowments, my Ivy Portfolio also outperformed Faber's trend following strategy that potentially bought and held all five asset classes at once, allocating 20% of the funds in the portfolio to each asset class.

About The Ivy Portfolio Authors: Mebane T. Faber is a popular speaker and writer who has worked as an equity analyst, a quantitative research analyst, and more recently as the Portfolio Manager at Cambria Investment Management. He operates several popular websites, one of which is directly involved with keeping the contents of this book up-to-date. Eric W. Richardson is the founder and CEO of Cambria Investment Management.… (más)