Almost everyone knows Harvard University is one of the premier names in the world of college academia. What most of the world may not realize, however, is that the geniuses managing its $27.6 billion endowment have become the envy of other Wall Street fund managers, and for the right reason — namely, achieving big and reliable returns with a long-term holding strategy.

In the past two decades, the Harvard endowment has averaged annual returns in the 15% to 20% range, a la Warren Buffett. Those numbers easily top the domestic large-cap market (the S&P 500), which has been neither reliable nor all that productive during that time. In fact, the market’s average return for the last 10 years is teetering on being negative. 

So what separates Harvard’s gurus from the rest of us? It’s probably not what you think…

Method to the madness
Here’s their secret: on average, only about 12% of Harvard’s endowment is committed to U.S. stocks. Between 20% and 25% of these funds — roughly $ 6 billion — are usually invested in foreign equities. About 15% of the portfolio is devoted to fixed income, with half being committed to foreign bonds. About a third of the endowment is split between private equity and hedge-fund holdings, while the last fourth of the endowment is split fairly evenly between real estate and commodities.



It’s a far cry from the typical portfolio for most investors, which averages about 97% domestic stocks. And, as far as international exposure is concerned, Harvard’s allocation is leaps and bounds beyond Standard & Poor’s chief analyst Sam Stovall’s current recommendation of 15%. Before scoffing though, don’t forget these pros have a 20-year track record of seriously strong performance. They clearly know something that the rest of the pros don’t.

(Still) Putting their money where their mouth is
As the familiar disclaimer warns, past performance is no guarantee of future results. On the other hand, considering the endowment’s managers have repeatedly proven their foreign stock picking prowess, following their lead could be a good strategy.

As for their favorite international picks, four are looking really smart right now.

1. Alcon (NYSE: ACL)
The fund’s biggest single-stock holding is also one of its newest — Switzerland-based Alcon. The company’s eye-care products are sold worldwide, making it the biggest eye-care company on the planet. Priced at 22.8 times trailing earnings, Alcon isn’t exactly a value play. Sometimes though, you have to pay a premium for something of value.

Alcon has two great things going for it — a great return on equity (ROE) and impressive free cash flow. Alcon’s ROE is an industry-leading 33.6%, while last year’s free cash flow was an impressive $2.93 per share.

#-ad_banner-#2. America Movil S.A.B. (NYSE: AMX)
The endowment also owns a nice collection of foreign telecom stocks, the biggest being America Movil, the Latin American wireless giant. It’s a prototypical emerging-market name Harvard’s fund managers tend to seek out.  

America Movil is priced a little more palatably than Alcon, at only 15 times its trailing earnings and looks even juicier at 12.1 times projected 2011 earnings. That may not be the biggest reason why the endowment now owns $30 million worth, nor is it solely why the portfolio increased its position by 36% last quarter. No, America Movil likely caught the attention of the endowment’s pros after it posted six consecutive annual earnings increases. It’s on pace for a seventh this year.

Some of those improving quarters were better than others, to be sure, but the company’s stale growth between 2007 and 2010 appears to truly be a thing of the past. This year’s anticipated 27% increase in the bottom line is set to be the strongest growth pace since 2007.

3 & 4: Southeast Asia, Brazil
Finally, one of the Harvard endowment fund’s biggest positions is its $200 million stake in the iShares MSCI Pacific ex-Japan Fund (NYSE: EPP). That being said, it’s worth noting the fund’s managers have allocated almost as much money to the iShares Brazil Fund (NYSE: EWZ). At last look, about $187 million of the $27 billion portfolio (about 0.7%) was invested in the Brazil exchange-traded fund (ETF), making it the biggest country-specific holding in the endowment.

The picks speak for themselves — they’re bets that the Pacific Rim countries and the South American powerhouse, most of which could be considered emerging market names, appear better positioned for growth than other geopolitical areas. Its interest in Brazil is one I explored and agreed with just a few days ago.

Action to Take –> Sometimes it pays to directly poach the picks of a team of stock-pickers who have more than proven their worth. Other times, investors can be better served by just borrowing the themes and underlying ideas of professional fund managers.

In this case, Alcon and America Movil are both apt to make solid long-term additions to buy-and-hold portfolios and can be confidently copied by investors. The two country-based ETFs, on the other hand, are a needlessly chicken-esque decision for the endowment’s managers.

To be clear, both emerging markets have a great deal to offer. The problem is, their respective funds only offer a watered-down version of that potential. Active investors are better off taking the bigger country-themed hint from Harvard’s endowment and then shopping for that locale’s better individual stocks. You could even start by simply looking at the top holdings of the two ETFs. [For my favorite picks in Brazil, check out my recent article.]