As we mourn George Luste, former University of Toronto physics professor and transformational president of the University of Toronto Faculty Association, who passed away on March 21, I want to discuss his wisdom and legacy as an investor. I came to understand George’s investment philosophy on the basis of several discussions, some in the company of renowned mutual fund manager Francis Chou, and I witnessed George in action when I served on UTFA’s investment committee several years ago.
As a physicist, George became involved in the University of Toronto’s venture into large scale computing in the Eighties and Nineties. He came to realize that large main frames were becoming dinosaurs and that the future lay with personal computers. Recognizing this technological sea-change, he began investing relatively early in personal computer companies. Despite starting with only his savings on an academic salary, he built up a large and rapidly growing portfolio. The lesson here is that if you see and understand a major technological change invest in it and, if it is profitable, keep investing in it.
The situation with UTFA’s investments was different. By the middle years of the last decade, UTFA had built up a small reserve fund of approximately $2 million, all of which was invested in either cash or bonds. The purpose of the reserve was to pay for exceptional expenses, such as litigation for grievances. Furthermore, the reserve funds of non-profits are constrained by law. If the funds grow too large, some of the money must be returned to the stakeholders.
George realized that UTFA’s portfolio composed entirely of bonds and cash was more risk-averse than it needed to be, so he recommended that the make-up of the portfolio be changed to one third cash, one-third bonds, and one-third equities (diversified equally between Canadian, US, and global). As the bonds bought long ago came due, the committee endorsed George’s recommendations, and shifted to the asset allocation strategy he recommended. To do this at low cost – something consistent with George’s personal financial parsimoniousness – he used index funds to implement the asset allocation strategy.
The committee implemented George’s investment strategy in 2006 and 2007. The global financial crisis of 2008 was a critical juncture, as the proportions of the portfolio in cash and bonds increased and that in stocks decreased. In a situation like that, if you believe your initial asset allocation decision correctly reflects your assessment of your needs and your attitude towards risk, you rebalance the portfolio. Again at George’s recommendation, the committee rebalanced the fund in early 2009 to sell bonds and cash and to buy stock funds. The timing was exquisite, as it took advantage of the bull market in equities that began in spring 2009. UTFA’s investment fund has done well since then, and has enabled the Association to give its members several holidays from paying dues.
This experience leads to three pieces of advice that are well-known, but hard to practice unless you are disciplined. First, develop an asset allocation strategy that reflects your situation in terms of the possible demands on your investment funds and the level of risk you are willing to accept. Second, use low-cost investment vehicles. Third, when the asset allocation in the portfolio gets out of balance, rebalance it.
George’s investment wisdom enabled him to do very well as a personal investor and enabled the organization he led and cared deeply about also to do very well with its investments. This is a legacy worth remembering.